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Tax Planning for Divorce

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If you are getting a divorce, taxes are probably not highest on your list of concerns. Still, you should consider a number of tax-related issues.

Property Settlements

Dividing property in connection with a divorce generally has no immediate consequences for either spouse. However, if the spouse who receives property in the divorce settlement later sells it, there may be a gain to report for tax purposes. So, potential taxes should be a consideration in deciding which spouse will receive which property.

Note that a spouse who receives property in a divorce figures any gain on a subsequent sale of the property using the transferring spouse’s basis (e.g., cost), not the property’s value when it was received.

For example: Michelle receives 10 acres of unimproved land in her divorce settlement. Her ex-husband bought the land for $25,000. It’s now worth $100,000. If Michelle sells the land for $100,000, she will have to report a taxable gain of $75,000 (the difference between the $100,000 selling price and the $25,000 cost basis).

Personal Residence

If a divorcing couple sells their home while they are still married, they are entitled to exclude up to $500,000 of gain from their taxable income if otherwise eligible for the exclusion. If the ownership of the home is simply transferred to one spouse as part of the divorce settlement, there is no taxable gain or loss at the time of transfer. However, should that spouse later sell the house while he or she is unmarried, only a $250,000 exclusion would be available.

Retirement Benefits

A divorce settlement often determines how retirement plan benefits will be divided. However, an employer may distribute retirement plan benefits to a former spouse only after receiving a court-issued document that meets the requirements for a qualified domestic relations order (QDRO). The benefits are taxable to the former spouse who receives them pursuant to a QDRO.

Dependency Exemptions

The Tax Cuts and Jobs Act of 2017 suspended the deduction for dependency exemptions for 2018 through 2025. But after 2025, the deduction will apply (unless additional changes are made). While the spouse who has legal custody of a child is generally entitled to claim the dependency exemption, this tax advantage is negotiable and can change from year to year. The custodial spouse can waive his or her right to the exemption, allowing the noncustodial spouse to claim it.

Does it still matter which spouse qualifies for the dependency exemption? Although the deduction for the dependency exemption is suspended through 2025, there are still benefits to the spouse qualifying for the child’s dependency exemption. Certain tax credits are available such as the child tax credit, (see below) child care credit and tuition credit generally to the spouse entitled to the exemption. Also, many states have a deduction for dependents.

Other Tax Benefits

Having a child qualify as a dependent may impact other tax benefits. For example, there is a potential child tax credit of up to $2,000 annually for each qualifying dependent child under age 17.

Alimony vs. Child Support

For 2018, payments that qualify as alimony under the tax law are deductible by the paying spouse and are considered taxable income to the recipient spouse. Child support payments, on the other hand, are not deductible by the paying spouse and are not included in the recipient spouse’s income. The IRS characterizes payments that are linked to an event or date relating to a child — such as high school graduation or a 21st birthday — as child support rather than alimony.

Note that the tax treatment of alimony will be different for taxpayers who divorce after 2018. Under the Tax Cuts and Jobs Act of 2017, no deduction is available for alimony payments made under post-2018 divorce or separation agreements and recipients are not required to include the payments in income.

These are just some of the tax planning issues that could be important in a divorce situation. Be sure to consult us to discuss how these general rules pertain to your personal situation.

Connecticut Rules Against Double Dip in Determining Alimony

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The “Anti-Steneken” Decision

On May 21, 2019 The Appellate Court of Connecticut ruled against the “double dip” in the case of PENNY OUDHEUSDEN v. PETER OUDHEUSDEN. The decision takes the opposite position of the New Jersey Appellate Court in 2004 in Steneken v. Steneken, 367 N.J. Super. 427 (App. Div. 2004) which decided the “double dip” was permissible.

So, what is the “double dip”? According to NJ attorneys Charles F. Vuotto and Lisa Steinman:

The “double-dip” refers to the double counting of a marital asset, once in the property division and again in the alimony award. More specifically, where a court uses a business owner’s “excess earnings” to value the interest in the business and also fixes support on that spouse’s total income (inclusive of the “excess earnings” used to value the business), a “double-dip” occurs. The tacit acceptance (by some) of a rule against the “double-dip” served to ameliorate the harsh result of distributing undiscounted business values while also fixing alimony on the same income stream used to value a business. However, the recent decision of Steneken, has submerged the availability of a rule against the “double-dip”.

Could this impact NJ divorce law? As of this writing we don’t know if the decision will be appealed to the Connecticut Supreme Court.  As forensic accountants and non-attorneys, we don’t know if New Jersey attorneys, using an out of state case, can try and overturn Steneken – something that would require a New Jersey Supreme Court Decision presumably on a new matter. That effort would take years and thousands of dollars in legal and expert fees. For the right case with enough dollars at stake it may make sense.

If you would like a copy of the PENNY OUDHEUSDEN v. PETER OUDHEUSDEN decision email Jeffrey D. Urbach, partner at jdu1@ua-cpas.com.  Jeff has been providing Court related litigation support services for over thirty years. He is a NJ Roster Rule 1:40 Mediator and is trained in Collaborative Law. Jeff is a CPA, ABV (Accredited in Business Valuations by the AICPA) and a CVA (Certified Valuation Analyst by the NACVA) among other advanced designations.

 

Urbach Teaching Divorce Taxation Webinar

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Back by popular demand, Jeff Urbach, partner, a long time NACVA (National Association of Certified Valuators and Analysts) Instructor and Course Developer, will be teaching Divorce Taxation Including the Impact of the 2017 TCJA (Tax Cut and Jobs Act) for the third time in 2019. The course is Day 5 of a Five-Day Matrimonial Litigation Series of Webinars given by NACVA.

What will the course cover?

  • Impact of TCJA
  • Taxation of Alimony and Equitable Distribution 
  • Marital Residence
  • QDROs
  • Marital Tax Fraud
  • Tax Filing Status
  • Other Related Topics

Jeff authored this popular course and first taught it in Ft. Lauderdale in December 2018. Since then, he led a Webinar in March 2019 and presented the class live at the NACVA/CTI 2019 Annual Consultants Conference in Salt Lake City in June 2019.

When?

The webinar is on Friday, August 9, 2019 at 1:00 PM EST is open to anyone through registration on the NACVA (www.nacva.com ) website. It will also be presented live again in Ft. Lauderdale in December 2019.

Who can benefit?

Attorneys and financial experts involved with the complex area of divorce taxation will find this program helpful either as a refresher class for experienced practitioners or an introduction for those new to the field.

Divorce: Savings & Retirement- Alimony Considerations

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At some point in the difficult divorce process you will be asked to fill out a CIS (Case Information Statement).

Divorce-Savings Consideration

The CIS is a financial disclosure document which, among other things, establishes your standard of living while married.

Schedule C of the CIS has a line where you put your historical savings/investments. Although the CIS shows monthly expenses (assuming 4.3 week/mo.), simply take your annual savings and divide by 52 and multiply by 4.3. Many people fund their retirement plans once a year, so it’s easy to forget this when filling out the form.

This includes all savings, not only what you may be contributing to your 401K or another pension plan. It also includes IRAs, Sec. 529 Plans, and non-retirement related investments.

Although this has been a long-established principle, it recently grabbed the attention of the legal community and the forensic CPAs who assist them. On September 12, 2016, the N.J. Appellate Division issued a ruling in the matter of Lombardi v. Lombardi.

The Court ruled:

It is well-established that the accumulation of reasonable savings should be included in alimony to protect the supported spouse against the loss of alimony…

We disagree with the court’s decision and hold that regular savings must be considered in a determination of alimony (emphasis added), even when there is no need to create savings to protect the future payment of alimony.

The decision is a good reminder that when meeting with your attorney it’s imperative to tell him/her about the pattern of savings you enjoyed during the marriage. If you have access to monthly or year-end statements from financial institutions holding your money, make sure you give them to your attorney.

Urbach & Avraham has almost a thirty-year history of providing attorneys and their clients tax, forensic, and other advice in current or post-divorce matters. Feel free to call or email if you have any questions.

NJ Alimony Duration Based On More Than Length Of Marriage

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A New Jersey Supreme Court ruling has provided much-needed guidance on determining the issues to be considered when a spouse in a divorce case requests alimony.

Divorcing Issues

This recent July 29, 2015  ruling applies to divorce filings prior to September 2014. Subsequent filings for divorce are subject to the NJ Alimony Reform bill (A845) as reported on our blog NJ Alimony Reform

In Elizabeth Gnall v. James Gnall (A-52-13) (073321), the state’s high court ruled that the length of a marriage is not the sole factor in deciding whether a spouse should get permanent alimony or limited-duration alimony.

 Here’s What Happened

The Gnalls were married for almost 15 years – with three children and substantial assets – when Elizabeth, who left her job as a computer programmer to care for their children, filed for divorce. James, the sole wage earner, earned more than $1 million a year as CFO of Deutsche Bank’s America Financial Group.

Following an initial trial court decision awarding Elizabeth limited duration alimony of $18,000 per month for 11 years, Elizabeth appealed. She requested permanent alimony, citing the length of the marriage and her diminished employability.

The Appellate Division reversed the trial court, ruling that a 15-year marriage is not short term and that an award of permanent alimony should be considered.

But the State Supreme Court said both lower courts got it wrong because they fixated on the length of the marriage. Instead, said the Supreme Court justices, NJ law (N.J.S.A 2A:34-23) requires that all thirteen statutory factors must be considered and given due weight.

 So What Does This Mean for Me?

Be aware that the length of your marriage will not be the sole determinant of the duration of the alimony you may receive. Among the factors the court will also consider are:

 

  • The actual need (of the recipient party) and ability of the parties to pay; 
  • The age, physical and emotional health of the parties; 
  • The standard of living established in the marriage ; 
  • The earning capacities, educational levels, and employability of the parties; 
  • The length of absence from the job market of the party seeking maintenance; 
  • The parental responsibilities for the children; 
  • The time and expense necessary to acquire sufficient education or training 
  • The availability of the training and employment;

NJ Alimony Reform Bill Signed Into Law by Governor Christie

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Major changes are here for those currently going through a divorce. On September 10, 2014 Governor Christie signed the NJ Alimony Reform Bill, bill A845, into law.

What does the new law accomplish?

• For marriages less than 20 years, the length of alimony payments cannot exceed the length of the marriage unless a judge determines that there are “exceptional circumstances”.

• Judges would be able to end alimony payments if the recipient cohabits with a partner, even if they don’t get married.

• Judges would have the authority to modify alimony payments if the payer has been unemployed for more than 90 days.

• The term “permanent alimony” would be replaced with the language “open duration alimony”.

While the new law applies primarily to future divorces, it does allow for a “rebuttable presumption” that alimony payments will end once the ex-spouse making the payments reaches the full retirement age for Social Security.

Jeff Urbach, Partner at Urbach and Avraham, CPAs spearheads our litigation support department which specializes in matrimonial accounting. Jeff and his team of valuation analysts and fraud examiners guide couples and their attorneys through the myriad of financial and tax issues of divorce. Please call our office if you or someone you know is going through a divorce to see how we can assist and what effect the new law could have on your situation.