By: Robert Harris
If you're going through a dissolution of marriage, you need to be aware of how tax law may effect you. A little planning can save you a lot of money. The most common tax issues relate to; The sale of the family home; Property settlements, Stock options; Spousal support (alimony); and Dependency exemptions.
Sale of Family Home: A couple can shelter $500,000 in profit from the sale of a home. But an individual can only shelter $250,000. So if your home has a lot of equity, it may make sense to sell it prior to the divorce becoming final. But remember, the couple must be married at the end of the tax year to maximize this deduction. So you may need to delay the entry of the decree as well.
Property Settlement: Transfers of property from one spouse to another and incident to the end of a marriage are not taxable. However, if the transfer takes place more than 6 years after the end of the marriage, it will be presumed to be a taxable transfer. So, if a property transfer in a property settlement has to occur outside the 6 year window, make sure the divorce settlement clearly identifies the transfer as one made incident to the divorce.
Closely Held Businesses: Redemption of stock in a closely held corporation or LLC can lead to taxation at ordinary income rates, even when no tax implications were expected or agreed to.
Stock Options: In Washington County particularly, we see a lot of divorcing couples where one spouse has stock options. The treatment for tax purposes will differ, depending on what type of options are owned. (Non-qualified options or incentive stock options). Some types of options are non-transferable, and even if they can be transferred there may be tax withholding to pay on the transferred options.
Spousal Support: In general, spousal support is tax-deductible to the person paying (payor) and taxable to the receiver (payee). Spousal support must have certain characteristics, so that it is clearly "support" and not in the nature of a property settlement. If the support doesn't terminate on the death of the Payee, or the support is heavily front loaded (There is a formula), then the payment may be deemed a property settlement and the payor will receive no deduction and the payee won't have to pay any taxes. In effect, a badly crafted spousal support provision can shift the tax burden onto the payor.
Dependency Exemption: The custodial parent gets the dependency exemption. Thats the parent with whom the child lives more than half the year. If there is a true 50/50 split, then the parent with the higher income gets the credit. If the parties agree that the non-custodial parent gets the exemption, then the custodial parent should sign an IRS form 8332. A divorce decree is only an acceptable alternative to a fully executed 8332 if the decree contains all the information contained in form 8332 and the custodial parent has signed the decree. A judges order alone is insufficient to transfer the exemption.
If you're divorce involves the distribution of high value assets, or significant spousal support, it's important to get legal advice that adequatly addresses the inevitable tax implications that arise. Harris Law Firm has lawyers experienced in divorce, and business and tax issues.
For expert advice on dissolution contact Harris Law Firm.