One of the issues that comes up in every divorce involves contemplation of the tax code. Uncle Sam is one of the litigants in your divorce. In terms of taxation and the tax code here’s why it matters.
Issues involving property settlement can often be crafted in a way that the tax implications are taken into account. Here’s what I mean. If there’s a retirement asset in the form of a 401k, that asset has pre-tax dollars that are resting in that account. A dollar in a 401k plan is not the same value as a dollar in say, home equity, which is not subject to income tax. So we often want to level the value of assets to take the tax code into account.
The other area where it really comes up most often involves the question of child support and spousal maintenance. The key feature in the tax code on these two pieces is simply that spousal maintenance is considered income to the recipient. You have to pay income tax on it if you receive alimony and the payor can deduct spousal maintenance or alimony, they mean one and the same, on their income tax return.
The opposite is true with regard to child support. Child support is not taxable as income to the recipient, but it is also not deductible by the person who pays. And so quite often what we do in deciding how to handle a situation where there’s a combination of child support and spousal maintenance is to meet with an accountant and try to figure out the most tax advantageous way to have that crafted.
Often we can create money through the use of the tax code. For example, if it’s an issue of spousal maintenance and one party’s tax bracket is much higher than the others, the payor will be able to deduct more out of their taxable income and receive a greater windfall in terms of a tax benefit, then the receiving spouse. So we’re actually creating dollars through the creative use of the tax code as far as an alimony claim is concerned.
So simply keep in mind that one of the issues we’re always looking out for are the tax consequences associated with the work that we’re doing.