Tax Issues Related To Divorce
Tax issues arise in every dissolution or 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 credit. Although with the changes in the federal tax law, dependency exemptions no longer have financial value, they must be allocated in order for a parent to claim the child credit.
With the changes to the tax law going into effect from Jan. 1, 2019, spousal support will no longer be tax-deductible to the payer and taxable to the recipient. This change in the law means that the payment of child support and the payment of spousal support will be treated the same for tax purposes. Nonetheless, it will still be important to determine the proper allocation of these two types of support.
Until Jan. 1, 2019, spousal support has been tax-deductible. If you are seeking to modify a preexisting spousal support order, it will be important to determine whether the support will have the same tax treatment after the modification as it did before.
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 nonretirement assets that might generate a capital gain or have no tax consequence at all.
Additionally, the nonretirement 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 proper treatment of these assets in the divorce is critical.
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 firm of Phyllis G. Bossin Co., L.P.A. has years of experience in dealing with such issues and involving tax experts when necessary to assist in evaluating the tax issues in the case.