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Divorce and Tax Planning

The deadline to file annual federal income taxes is quickly approaching. Many Americans will be looking to their CPA or tax professional for advice on how to best maximize their income tax return. One overlooked person you should probably be consulting about taxes and potential tax implications is your divorce or family attorney. Divorce and separation are a financially difficult time for most divorcing couples. Tax implications of potential settlements or court orders should not be overlooked.

Spousal maintenance is an issue that should be considered viewed through the spectrum of the tax code. Spousal maintenance is referred to as “alimony” in the tax code. It is deductible to the payer, and taxable as income to the recipient. Moreover, if the two spouses are in separate income tax brackets, special attention should be paid to the overall implications of savings or loss between the two spouses. Child support is treated differently. Child support is neither tax deductible to the payer nor is it taxable for the recipient.

One option sometimes considered by divorcing couples is called “family support.”  Family support is when a paying spouse pays a lump sum for both spousal and child support, and the support is characterized in the appropriate agreement and court order as “family support.”  If the court orders a lump sum and calls it “family support,” this is referred to as “undifferentiated family support.” Depending on several factors, the majority or entire amount of undifferentiated family support might be deductible for the paying spouse and taxable income for the receiving spouse.

If there is a marital residence to be divided in the divorce, the spouses should also consider the impact of capital gains tax if the parties plan to sell the house relatively soon. The exemption for gains on selling a residence are vastly different depending on several factors. For example, if a single person sells a residence, the exemption for capital gains is capped at $250,000. However, if a married couple sells a residence, the exemption is doubled and is capped at $500,000.

Taxes and divorce both have many complications. You should consult both your tax expert and your divorce attorney when considering these options. We have experience in helping our clients identifying potential tax issues and pitfalls in their divorce. Call us today at (253) 272-9459 to talk about your case.

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