Divorce & Taxes

Every divorce causes tax consequences. In your divorce, you may sell property and divide the proceeds with your spouse, divide marital property between you and your spouse, transfer property to your spouse, pay or receive spousal support or child support, and determine which spouse shall be entitled to tax benefits related to the children. Your divorce will also result in a change in your federal tax filing status.

Because of all this, it is important to take tax consequences into account when going through a divorce. There are certain principles that provide ready answers to many tax questions.

Deductions and Credits

Your income tax is determined by applying the income tax rates to your taxable income. An item that qualifies as a tax deduction is deducted from your income when determining taxable income, thereby lowering your taxable income and your tax. If you are in the 33% federal tax bracket, a $100 tax deduction lowers your federal tax liability by $33. Home mortgage interest and alimony payments are examples of tax deductions.

An item that qualifies as a tax credit is deducted directly from your tax. Whatever your federal tax bracket, a $100 tax credit lowers your federal tax by $100. A child tax credit is an example of a tax credit.

Support 

In determining your income taxes each year, you are entitled to deduct the amount you pay to your spouse or former spouse as alimony, as he or she is required to include it as income. You cannot deduct the money you pay for child support, and your spouse or former spouse is not required to include this amount in income.

If you are the payee spouse, in evaluating an offer, be certain to take into account the fact that the alimony is taxable to you, and all the ramifications of that fact will fall to you. For example, your receipt of taxable alimony may result in a decrease or loss of the earned income credit you would be entitled to otherwise.

In order to qualify as alimony, your payment must meet all of the following requirements:

• It must be to or on behalf of a spouse or former spouse.
• The payment must be in cash.
• Payment must be under a written divorce agreement or order.
• The agreement must not designate the payment as something other than alimony.
• There cannot be a payment requirement after the death of the payee.
• Payment is not made in a year for which the parties file a joint return.

Retirement Accounts 

A Qualified Domestic Relations Order (QDRO) is a court order that provides for payment of benefits from a qualified plan to someone other than the plan participant, generally the participant’s former spouse. The benefits are taxable to the former spouse under the same tax principles that apply to payment to the plan participant.

The transfer of all or part of your traditional Individual Retirement Account (IRA) to your spouse is not a taxable event. From the date of the transfer the account is treated as your spouse’s traditional IRA, and your spouse will incur the tax consequences of withdrawing funds from the IRA.

Filing Status 

Your federal income tax is computed by applying the appropriate tax rates to your income. The tax rates depend upon your filing status, which in turn depends on, among other things, your marital status at the close of the taxable year. You are married until the judge signs the judgment or decree of divorce.

While married, you and your spouse can report your combined income on a joint tax return and calculate your tax using the married, filing jointly tax schedule, or you can file separate tax returns. In that case, you calculate your tax using the married, filing separately tax schedule. For years when you are unmarried, your tax filing status is either single or, if certain conditions are met, head of household.

Each filing status has its own schedule of tax rates at various income levels. The married, filing separate schedule has the highest tax rates at any given income level below the maximum. The married, filing jointly schedule has the lowest tax rates.

Married taxpayers generally will pay a lower total tax by filing a joint return. Sometimes divorcing spouses do not even check whether money can be saved by filing a joint return because they cannot work cooperatively.

Children 

There are several tax benefits associated with children that can be allocated between the spouses by agreement or order, including exemption for dependents, child tax credit, child care credit, etc.

Deductions for the Family Home 

You can deduct home mortgage interest and real property taxes of the marital home even if you no longer live there, if a dependent of yours lives in the home, so long as a dependent of your lives in the home. If your agreement provides that your spouse has use and control of the jointly owned home, and that you must pay all of the mortgage and tax payments, you can deduct and your spouse may have to include a portion as alimony.

Who Gets the Marital Home?

In most divorces, the family home is the couple’s largest asset. It can also be a very emotional item. Very likely, you and your spouse decided in happier times that it was where you wanted to spend your lives together, and it may be where your children have lived most of their lives. This can make it difficult to let go and assign a value to.

Because the house can be so valuable and so important, it can be the linchpin of negotiations for a property settlement. Deciding what you are going to do with the house often helps put other property issues into perspective, both financially and emotionally. There are three common ways to deal with a family home at divorce: put it on the market, agree that one spouse will buy out the other, or agree that you’ll continue to own the house together.

Selling the Home

If neither of you want to, or can afford to, stay in the home, you can put it on the market and try to get the best possible price for it. Keep in mind that before the sales proceeds can be divided, you’ll have to pay off the mortgage, any equity line or second mortgage, and the brokers’ fees. You will also have to pay any capital gains tax that might apply.  The expenses are one disadvantage of selling, especially if market conditions are not good for sellers. Another disadvantage is the need to uproot the children at a difficult time for them.

But there are advantages, too. Both spouses get money to start over, and it may help you make a clean break – neither of you will have to deal with the memories of better times in the family home.  Instead of making an emotional decision, you might consider hiring a financial planner.

Once you’ve decided to sell, you will be faced with a lengthy and detailed process that involves a number of projects. Each of these takes hard work in the best of times an emotional upheaval that comes with divorce doesn’t make them any easier.

Between the two of you, you’ll have to pick a real estate agent, settle on an asking price, prepare to show the home, review offers and ultimately divide any profit.

Negotiate a Buyout

Another way to deal with the family home is for one spouse to buy out the other’s interest. Often, the custodial parent buys out the non-custodial parent so that the children can stay in the home. The advantages are obvious: the house provides continuity and stability for the kids, and you don’t have to sell if market conditions aren’t good. In any buyout, each party bears a risk. The selling spouse may lose out on future appreciation, and the buying spouse may end-up feeling the price was too high if the property depreciates in the future. A buyout can also be a financial stretch for the buying spouse.

Quite often, buyouts occur over time, with both spouses keeping an interest in the house for a while; in most cases, the buyout is completed as part of the divorce settlement.

Once you’ve agreed on a fair market value for purposes of the buyout, you may decide to adjust it, for any of a variety of reasons. The most common are the broker’s fee, deferred maintenance, spousal support considerations or refinancing issues.

Continue Owning the House Together

It’s not unusual for spouses to continue owning the family home together, especially when children are involved. If one of you wants to buy the other out buy can’t afford to do it all at once, you might agree that payments can be made over time while both of you share in interest in the house. 

The advantages to continuing to share ownership are that if the custodial parent can’t afford to buy the other one out, the obvious advantage is that the children get to stay in the house anyway. This can make a buyout possible by spreading payments over time. 

The disadvantages can be significant. Because the two of you are jointly responsible for the entire mortgage, a credit report for either of you will show the entire amount of your mortgage. Having such a large debt on your credit report – especially if you are not living in the house – can make it difficult to get credit for other purposes. Finally, you always bear the risk that your spouse will make late payments which will hurt your credit rating.

Searching for Hidden Assets 

Unfortunately, it’s not uncommon for people in a divorce to try to hide assets. They may simply fail to disclose bank accounts, claim that an asset is less valuable than it really is, or make deceptive payments to an unknown person to hide the money’s location. Some of the most common ways that spouses hide assets from each other are:

• Altering the books of a business to make it look less valuable than it is, or to show more accounts payable or payroll obligations than the business actually has;
• Underreporting income on tax returns and financial statements;
• Failing to identify or disclose retirement accounts;
• Making secret agreements with employers to defer bonuses or pay increases until after the divorce is final; or, for someone who owns a business, delaying profitable deals or contracts;
• Owning property such as a house, a boat or some stock in another city or state because the other spouse doesn’t know about it because the hiding spouse “takes care of the finances;”
• Opening bank accounts as custodial accounts in the name of one of your children;
• Repaying fake debts to friends or relatives, thus appearing to reduce assets, and
• Putting friends or family on the payroll at work when they are not actually working.

If you think your spouse might be hiding assets, if you are in any way unclear about precisely how much money your spouse makes or has made during your marriage, if your spouse is a part owner of any type of business, if your spouse is commonly paid in cash for the work they perform, if you are one of those spouses who leaves all the financial matters to your spouse (and have always done so), it’s probably worth your while to contact us and our forensic accountants. We’re trained to reveal financial improprieties like these and make sure your settlement is fair. 

Attorney Irwin M. Pollack will often gear up the discovery process and request old tax returns, all bank accounts with the opponent’s social security or business tax ID number, motion the court for inspection of safe deposit box contents and past activity monitors, take depositions and sends subpoenas.

Utilization of these tools, among others, generally goes a long way toward ensuring that you get a share of all property in which you have an interest.

The divorce lawyers and family law attorneys at The Massachusetts Family Law Group are tireless when it comes to tracking down hidden assets or unreported income. Most recently, they’ve been known to:

• Track down credit reports. These reports often show that a spouse has secret credit cards.
• Examine local registries of deeds to find liens against the marital home because your spouse may have borrowed without your knowledge, or transferred or sold some other property interest in real property.

For more details on tracing and finding hidden assets, click here.

FAQ: Massachusetts Support & Alimony 

Unlike child support, alimony is not calculated using a set formula. It is based upon many factors, including the parties’ incomes, earning capacities, and needs.

Alimony is gender-neutral. While most cases involve a husband paying a wife, there are cases where those roles are reversed. Alimony is generally reserved for long-term marriages where there is a fairly large disparity between the incomes of the spouses. There is a tax advantage to the spouse who pays alimony, as it is deductible from income. Conversely, the spouse who receives alimony will have to claim that money as income subject to taxes.

Alimony is most often appropriate in cases where a spouse stayed home to raise the children. By deferring career aspirations, the stay-at home spouse is generally at a disadvantage in the working world. However, the contributor of the home has as much value as the primary breadwinner in making an assignment of alimony or division of assets.

Our offices are regularly inundated with questions relating to alimony:

Q:  Can alimony be paid in addition to child support?

A:  Usually not in Massachusetts. In most families, there isn’t enough money for alimony after child support payments.

Q:  I’ve heard of “rehabilitative” alimony and “lifetime” alimony. What is the difference?

A:  Rehabilitative alimony gives the payee spouse time to hone skills in the workplace in order to provide themselves an equalized income and lifestyle during the short-term. Lifetime alimony is only awarded in cases of long-term marriages. In Massachusetts, this means 20 years or more.

Q:  My original judge did not provide for alimony.  Now I really need it.  What can I do?

A:  You can file a Complaint for Modification so long as the alimony provision didn’t survive as an independent contract and there’s a substantial change in circumstances.

Q:  My former spouse doesn’t want to pay me alimony and keeps threatening to either stop paying or file for bankruptcy. What are my options?

A:  If your spouse doesn’t pay, ask your lawyer to file a Complaint for Contempt. Bankruptcy won’t affect you as alimony is not a dischargeable obligation in the bankruptcy court.

Understanding Emancipation 

The terms minor child and unemancipated child are often used interchangeably, but they do have different meanings in the Massachusetts Probate & Family Court. 

The confusion usually relates to parental responsibilities relating to child support for an unemancipated child over the age of 18.

Under Massachusetts law, parents have a duty to support children over the age of 18, but under the age of 21, if the child principally depends on that parent for support. Moreover, if the child turns 21, but is under the age of 23 and still attending some undergraduate college program, then the parents may be ordered to provide support for that child.

No matter where you live in Massachusetts, Attorney Irwin M. Pollack and the staff lawyers from The Massachusetts Family Law Group can zealously represent you relating to your divorce or family law matter.

Our offices are in Norwood, Andover, Worcester, Springfield, Plymouth and on Cape Cod.  For a no-obligation consultation, call (800) 910-DIVORCE or contact us today.