As family lawyers, the attorneys in our firm see many situations where tax effects are involved and too many situations where tax effects have not been considered in settlements and negotiations. These issues arise from property settlements, transfers of property and the payment of support. I wanted to outline a few of those that come to mind and make some notes on them.
Property Settlement and Support Tax Issues in Ohio Divorces
Transfers of marital property between spouses for property settlement are not taxable or deductible.
If you and your spouse are splitting a bank account, the money in there is already owned by the two of you and is essentially money which was put there after taxes. Thus, the division and the distribution of the account is a division and distribution which is not affected by taxes.
The same principle applies if you receive the marital home. The equity in the home has been built up either by contributions of money or earnings upon which you have already paid taxes, or through appreciation (which may or probably won’t be taxed when you sell the home). Either way, there will be no tax due when the home is transferred to you. Note that there are forms which can be filed at the time of any transfer to indicate that the transfer is pursuant to a court order and is not a taxable sale.
Receipt of child support is not taxable, and payment of child support is not deductible.
The payment of child support is not something which is deductible, and the receipt of child support is not taxable.
Receipt of child support/alimony has been taxable, but may not be in the future and in some cases, will not be.
In the past the payment of alimony or spousal support has led to the ability of the payor to deduct the payment from income and the obligation of the payee to include it in income. The newest tax law will eliminate deductions for alimony obligations originating after 12.31.18. A question will be what the effect of the law will be on alimony obligations which are amended after 12.31.18 to new amounts.
Payment of spousal support/alimony has been deductible, but may not be in the future and in some cases, will not be.
In the past the payment of alimony or spousal support has led to the ability of the payor to deduct the payment from income and the obligation of the payee to include it in income. The newest tax law will eliminate deductions for alimony obligations originating after 12.31.18. A question will be what the effect of the law will be on alimony obligations which are amended after 12.31.18 to new amounts.
Even if spousal support/alimony is deductible and includable, it may not be if it was for temporary support.
The rule is that there must be an order for payment of the alimony, and that the parties must be living separately and that they cannot file a joint return.
Legal expenses from divorces may be deductible to the extent that they were used for preservation of income-producing assets.
Another reason to check with a tax professional before, during and after a divorce process is that legal fees incurred in preserving income-producing assets may be deductible.
Legal expenses related to the collection of alimony or spousal support may also be deductible.
Regarding alimony, see: www.irs.com/articles/tax-deductions-for-divorce-related-fees
$100 of this may not be equal to $100 of that.
If, for property settlement purposes, your spouse owes you $100, is a transfer of a bank account to you equal to that $100 if the account has $100 in it? The answer is “yes.” If, for property settlement purposes, your spouse owes you $100, is a transfer of a pre-tax retirement plan with $100 in it equal to the $100 owed? The answer is “no.” Why aren’t they equal? The answer is because the $100 in the plan will be taxed, at your tax rate, when you withdraw it. If it is taxed at 30%, you will only end up with $70 after taxes. This is in addition to any 10% penalty for early withdrawal. So, $100 less 30% tax and with the 10% penalty would yield you $60 if you were doing an early withdrawal.
In attempting to equalize what each spouse is receiving, even $100 worth of XYZ stock may not be equal to receiving $100 of ABC stock. Why not? If the XYZ stock was purchased for $20 and it is sold now, there will be a gain of $80 on which tax must be paid, whereas if the ABC stock was purchased for $80 and is sold, now the taxable gain will only be $20. The difference is that each person is selling $100 worth of stock but one of them owes tax on an $80 gain and the other only owes tax on a $20 gain.
The bottom line.
The bottom line here is that people who are or who will be involved in a termination of their marriage, or who have ongoing spousal support/alimony situations, need to be consulting with tax professionals regarding the tax effects of many of the aspects of the support and property-settlement issues which are involved.
William Geary and the members of his firm practice solely in family law matters. William Geary has been in practice for 39 years and is admitted to practice before the Ohio courts, the Federal District Court for the Southern District of the State of Ohio and before the U.S. Supreme Court.
Add A Comment