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Taxes and Divorce

Ah April 15th. Tax Day here in the United States. This year we actually get a break as the 15th turns out to be a Sunday but alas, the tax man cometh and there’s not much we can do. But what about taxes and divorce? Do you really know what the tax implications of your settlement will be today? Tomorrow? 10 years from now? All excellent questions to ask your mediator. As a divorce mediator with an MBA in Finance, I am acutely aware of what taxes can do to a settlement. There are the obvious kind like when you go to sell your house will there be a capital gain on it and then there are the hidden ones like what was the cost basis of an investment you just got handed in your property settlement agreement? Sure it looked great on paper but are you going to get whacked once you go to sell it while in the meantime you ex took all the tax losses and laughed all the way to their accountant?

When it comes to taxes and divorce, there are a few simple rules you need to keep in mind:

  • Taxes come in all shapes and sizes - it’s not always obvious when you’re going to get hit with a tax. Take for example a tax on an asset you sell. If it’s a stock and you make money, you’ll have a capital gain and get taxed. But what about if you sell your home for more than you paid for it? Will there be tax on that? In that case, it’s not so clear.
  • Tax losses are just as valuable as taxable gains - in some cases I’ve seen one spouse appears to be a hero and says to the other “don’t worry – I’ll take all the loser investments and you can have all the winners.” Nice try. On paper perhaps they look identical but one of you will have a nasty surprise when they file next year while the other will have gotten an unexpected windfall. Each of you winds up with the same gross amount of cash in your hand but after taxes, it’s a whole new ballgame.
  • Watch out for alimony - the default position for alimony is that it is taxable and so some individuals receiving spousal support want to have more of their support placed in child support (which is a non taxable event). The trouble is child support ends when the children are emancipated (age 18+) so what happens if you’re the mother of two teenagers and go this route? Nasty surprise – your alimony just went out the window when the children got their cap and gown. Using alimony and child support interchangeably to avoid taxes is a tricky proposition and something best discussed with a mediator like myself.

At the end of the day you need to realize that taxes and divorce go hand in hand and so it’s critical that you have a mediator that understands the impact taxes can have on your final settlement and when in doubt I say get the advice of an accountant or CPA. Sure we may discuss the tax issues in session of your settlement, but these folks eat, sleep and breathe taxes (literally at this time of year) and have a grasp of the subject that we mere mortals simply do not.


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