Tax Considerations in Divorce
In the pain, stress, and hurt of divorce, spouses and their legal counsel typically focus on maximizing property settlements for themselves or their clients. Property values, however, do not equal after-tax cashflow. Our role in divorce planning is to work with our client and his or her family law attorney or mediator to minimize or eliminate the tax burden produced by their proposed property allocation.
Not all assets of equal fair market value produce the same after-tax cash. What seems like a reasonable distribution of property between spouses often produces and inequitable tax burden. Conversion of some property into cash may result in a 40% tax hit. The same value of other property may be taxed at less than half that amount increasing after-tax cash by one third. Other property may be converted to cash with no tax cost whatsoever.
There are significant considerations in how tax returns should be filed in years of estrangement, separation, and divorce. While state law may dictate how income is to be allocated between the spouses in these years, special provisions in Federal tax law may protect one of the parties from tax liability more properly allocated to the other spouse. In a similar manner, requests for extensions of time to file returns and allocation of estimated payments between the spouses can significantly affect an individual's ultimate responsibility for paying income tax. Divorce decrees should address potential tax liabilities assessed after divorce that arose during years of the marriage. All too frequently the legal documents or silence on this important point.
Our tax professionals advise many clients each year on tax considerations in divorce. We work with family law specialists, mediators, and collaborative attorneys to supplement their advice and counsel to ensure that our mutual clients receive a fair and equitable settlement after the tax impacts are of divorce considered.
©2008 Ronnie C. McClure, PhD, CPA