DIVORCE AND THE TOUGH FINANCIAL DECISIONS

IF YOU'VE EVER BEEN THROUGH A DIVORCE OR KNOW SOMEONE WHO HAS...YOU KNOW THAT IT'S RARELY SMOOTH SAILIING DURING THE PROCESS OF MAKING TOUGH FINANCIAL DECISIONS. BUT THERE IS A VERY COMMON DECISION MADE THAT CAN UNKNOWINGLY COST A BUNDLE...

LOVE AND MARRIAGE, LOVE AND MARRIAGE, GO TOGETHER LIKE...Well, you know the song. But more than 50% of marriages end in divorce, and the lyrics quickly change from "love and marriage" to "alimony and child support." Most people know their alimony payments are tax deductible and most also know alimony received is taxable income. But some innocent and seemingly harmless changes in the way alimony is paid can wipe out the deduction and make receipt of it tax free. And in an already emotional environment, more misunderstandings and legal battles are less than welcome.

According to the IRS, alimony can be claimed as a deduction in the year paid if the payment is made in cash. That's the key point - it has to be paid in cash or by check. If it is used as part of a buyout or trade for personal items, furnishings or home equity, the deduction is disallowed. This can be a major issue, especially where home equity buyouts are concerned.

Picture a divorce situation where, after a legal battle, it is determined one spouse is obligated to pay the other alimony. And because the legal settlement took some time to reach, there is back alimony owed by Spouse A to Spouse B of $20,000. Additionally, Spouse A is leaving the marital home but has the right to half the equity in the home, which comes to $20,000 for their share of the home equity.

So...in the interest of keeping things simple and not having to take out loans or sell the marital home, the parties agree to trade the $20,000 owed to Spouse A in home equity for the $20,000 owed to Spouse B for back alimony. While this may appear to be a fair and reasonable way to settle the issue, it does not meet the IRS requirement for alimony to be paid in cash in order for it to be tax deductible. This issue is surprisingly common, and just recently the IRS Tax Court disallowed an ex-husband's deduction for alimony (2006-122 Rocke Richard LaBozetta, Petitioner v. Commissioner of Internal Revenue, Respondent) because it was a trade of equity for back alimony and not paid in cash. Had the ex-husband known this prior to the settlement, he may have structured the settlement agreement differently to take advantage of the tax deduction.

Again, this could be a very common mistake for many individuals and could be a very costly mistake when counting on an extra tax deduction. It is important to take the time to meet with divorce, tax and real estate professionals that can help you make the correct financial decisions. If you need or know of someone who needs a referral for a tax or divorce professional, please contact me and I will be happy to recommend either to you. As well do not forget that I am a trained Separated Family Specialist© (SFS).

Separated Family Specialists® (SFS) are trained to a innovative, constructive, approach to solving the problems inherent to owning real estate when a family separates or when a spouse leaves the marriage.

Divorce: What You Need to Know About Your House, Your Home Loan and Taxes Click Here