Tax Issues Related to Divorce

Tax issues arise in every divorce, whether a simple or complex case. If there are minor children, an analysis will have to be undertaken as to which party will benefit more from the child dependency exemption, taking into account the child credit and whether it will be lost if one person or the other claims the exemption.

Also, it will be important to determine the proper allocation of support between spousal and child support. Child and spousal support have very different tax treatments. An analysis will be needed to determine the most beneficial allocation of payments between child and spousal support, to maximize the income that each party has for living expenses and to minimize the tax burden on both parties.

This analysis is sometimes quite complex. Child support is never taxable to the recipient, while spousal support is taxable to the recipient and tax deductible to the payor.

There are also tax considerations that arise with regard to the division of property. Although property settlements are not taxable, there are generally assets that are taxable that are being divided. These tax consequences must be taken into consideration when dividing the assets. For example, most retirement assets are taxed as ordinary income when they are received and therefore will be looked at differently than non-retirement assets that might generate a capital gain or have no tax consequence at all.

Additionally, the non-retirement assets that are being divided, such as brokerage accounts, stocks, etc., have different tax bases so it is important that the assets are being divided in such a way as to consider the tax consequences when liquidating these assets.

Furthermore, certain assets, such as stock options and restricted stock units (RSUs), cannot be transferred to the other spouse as a general rule, even though these assets are marital assets. They will remain titled to the person to whom they were granted and the spouse will receive the right to receive proceeds. When these options or RSUs are liquidated, they will be taxed to the holder of the option or RSU, even if the other party is receiving the proceeds.

The manner in which these taxes will be calculated must be established. A highly contentious issue is whether the tax consequences of the ultimate sale of a business should be considered by the court in determining the value of the business. It is critical that attorneys understand the tax consequences involved in each case.

Another contentious issue is the determination of what portion of unvested stock options or RSUs are marital property and if they are to be divided or considered as income for support purposes.

Although family law attorneys cannot give specific tax advice, they must understand the ramifications of any settlement and must be prepared to put on evidence in any trial regarding tax consequences. The lawyers at Phyllis G. Bossin & Associates have years of experience in dealing with such issues and involving tax experts when necessary to assist in evaluating the tax issues in the case.

To learn more or to set up a consultation, contact our office in Cincinnati, Ohio, at 513-421-4420 or use our online contact form.