Tax Issues in Divorce Law
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There are many issues that arise in a divorce case for which it may become necessary to involve a Certified Public Accountant. The most common scenarios are as follows: 1) Business evaluations: When one or both spouses own a business it may become necessary to have the business valued for purposes of the property settlement. Typically, both parties will sign a letter of agreement with the designated CPA which lists the financial documents and business records the CPA will need in order to perform the evaluation and the parties are required to cooperate in the process. The CPA is not an advocate for either party, and prepares a neutral report based on the documents reviewed as to the value of the business. 2) Alimony: A CPA can give advice and information to an attorney about preferable methods for calculating alimony payments, and what the actual value is to each party, whether you are the recipient or payor. If you are a supporting spouse with an alimony obligation, the payments you make are a tax deduction for you. If you are a dependent spouse receiving alimony, these payments are counted as income to you, and are taxable. Therefore, the actual amount of support that you are paying or receiving will not be the raw number that is stated in the separation agreement or consent order because of the tax consequences. It is helpful to know the exact figures that each party will be paying and receiving in negotiating support issues. In some cases, one spouse may consider giving the other spouse a lump sum payment of alimony up front rather than paying a monthly amount over time. In these cases, a CPA can not only provide figures that account for the tax consequences, but can prepare an amortization table that discounts the sum for present value. In other words, a CPA can figure out what the financial value is to a party receiving a lump sum award versus an amount being paid out over time. 3) Filing tax returns: Many people have questions about how they should file a tax return once they are separated. For tax purposes you are married for the whole year if you are separated but you have not obtained a final decree of divorce by the last day of the year. As married you may only file as married filing a joint return or married filing a separate return. In most cases (but not all) filing jointly results in the least amount of income taxes. If you are single you may file as single or head of household (if you qualify). An exception to marital status applies if you live apart from your spouse during the last six months of the year, and meet certain requirements. If you qualify for this exception you may file as head of household which in most cases will result in lower income taxes. A CPA can advise whether you meet the necessary criteria. If spouses or former spouses are filing returns separately, questions also arise as to how certain tax exemptions should be allocated or split. The most frequent examples are the dependency exemption and the mortgage interest deduction. It is important for any legal document addressing property or support rights to clarify these issues. If these issues are not addressed, then a CPA can advise as to what default rules apply. 4) Questions About Income: Sometimes when people separate, one of the spouses may attempt to disguise their income, by making it appear that they make less money than they actually do. This commonly happens in situations where one of the parties is self-employed and has greater flexibility in reporting their own income. A CPA can be helpful in such a case by advising an attorney what to look for and reviewing tax returns and other financial documents for evidence that one of the spouses is manipulating their reported income. Resource Links:Todd Rivenbark & Puryear, PLLC, a regional firm of independent Certified Public Accountants providing accounting, auditing, tax, business valuation and management consulting services IRS Website Contact Heather Williams at Crawford & Crawford, LLP, Attorneys at Law at 919-510-8140 to schedule an initial family law consultation to discuss tax issues in divorce law. |
