When we’re dealing with a divorce, obviously the concept unrelated to custody but related to assets and liability (specifically assets), we look at all the assets, we inventory them, we value them and then we divide them. Once we have determined what is marital and what is separate and we have divided the marital assets, we look at each asset and determine whether there is going to be a tax consequence. The concept is that you may want the $250,000 in stock and I may want to have the house on the lake, but those are two separate entities. The house on the lake may be property division which is not a taxable event, but the stock may have a huge capital gain which is going to have a tax consequence counting on transfer.
As we try to divide the assets, we have to look at whether it really is a fair division. You want to make sure that the stock is at least equal value to the house that the other person got, and with the capital gain tax consequence attached to it, it wouldn’t be. So every single item that gets divided has to be looked at with an eye toward taxation.
Q: Let’s say my soon to be ex-spouse is buying me out of my home, is that ever a taxable event?
Typically not. Typically if it’s been your primary place of residence, and it has not been an investment property and depending on the value of the home, that would be cash out to the person who is receiving the cash from it as a non-taxable event. That, of course, assumes that the home is not an investment property and there is no capital gain attached to it. Normally in the division of equity in a home, you’re looking at a non-taxable event.
Q: If we’re divorced during the course of the year do we have an option to file taxes married filing jointly and is that a negotiating point?
If you were married December 31st of the tax year, then you can file jointly for that tax year. If you got divorced on December 30th, then you were not married throughout the entire year, and you would file individually for that tax year.
Often when we get to the 11th hour of the tax year depending on how much people are earning, we may recommend that we sign all the documentation in December, but we won’t have the final divorce proceeding until January if it’s beneficial to remain married for that tax year.
Q: On income taxes, if I’m the spouse that was not earning any money and the other spouse was making all the money, is it an instance where it can be a negotiating point?
It can be, but depending on whom I’m representing. Let’s say I’m representing the husband who is making a boatload of money and he wants to file married for that tax year, and you’re representing the woman who makes nothing, and she doesn’t want to just because she’s being difficult. I’m going to take a look at what the difference is for filing jointly that year and I’m going to say, if your client’s refusing to do it, it’s going to cost me an additional $40,000 in taxation and $20,000 should be shared by her because it’s her fault. So I might be able to push you into agreeing to assist.
Also, something people don’t think about is if you’re going to be receiving spousal support you’re going to have a tax consequence relating to that. That’s something else you need to take into account when you are talking about different settlement terms. For example, if you’re getting $1,000 a month in spousal support, it’s not really $1,000 a month coming to you. You have to take into consideration the tax consequence. Further, the person who is paying the spousal support is going to get an above the line deduction which is going to be a benefit to them. So that is something to consider as well when you are dealing with the determination of spousal support and the tax consequences relating to that. However, this is all changing for divorces that are finalized after December 31, 2018. Stay tuned for a future blog regarding the effects of the new tax law on spousal support.