Considering Tax Consequences in the Context of Divorce

divorceIt is important to consider the various tax consequences in the context of divorce in order to enter into the most beneficial support arrangement for divorcing spouses and determine how to prudently divide assets.  A tax analysis can be a useful tool in an effort to support a settlement position and illustrate the overall after-tax impact on the family unit.

With respect to support – be it child support or alimony (spousal support) – there are important tax related considerations that parties and counsel should keep in mind when structuring a support arrangement.  Child support is not taxable income to the recipient parent and it is not deductible for the payor spouse.  In contrast, alimony is included as taxable income to the recipient spouse and is tax deductible for the payor spouse.  Often, given that alimony has a significant tax benefit to the payor spouse, parties may enter an agreement wherein the parties agree to an “unallocated support” order which is treated as alimony for tax purposes, or they may create a support obligation wherein the payor spouse pays some alimony and some child support.  In some circumstances, especially where the payor parent is in a high tax bracket and the recipient parent is in a low tax bracket, a higher alimony payment may be more beneficial for both parties than a straight child support payment; putting more money in the pocket of the recipient and providing a dollar for dollar tax deduction to the payor.

Parties and counsel should discuss the pros and cons of the parties’ income tax filing status during divorce proceedings and prior to the entry of the Judgment on Divorce (i.e. married filing jointly vs. married filing separately or head of household). Filing jointly is typically a more beneficial filing status than married filing separately. In addition, parties and counsel should prospectively consider how/if dependency exemptions, real estate tax and mortgage interest exemptions will be shared.  In some cases such exemptions may not be available to a high earner as such exemptions are phased-out in higher tax brackets or due to Alternative Minimum Tax.  It is important to include specific language in a Separation Agreement regarding tax exemptions and which party is entitled to claim same to prevent confusion down the road.

Finally, in dividing assets at the time of divorce, parties and counsel should bear in mind the difference between liquid assets such as bank accounts, mutual funds, etc. and pre-tax assets including IRAs, 401(k)s and other retirement accounts (excluding Roth IRAs).  By way of example, it would not be an equal division for one party to receive $100,000 in cash from a checking account and the other party receives $100,000 in pre-tax retirement assets.  Although each party is receiving $100,000, the party receiving pre-tax retirement funds is actually receiving less than $100,000 because said funds have not yet been taxed.

Whether or not you seek the opinion of a tax expert, parties and counsel should not overlook the various scenarios in the context of divorce wherein tax consequences should be considered and addressed.

Thanks for installing the Bottom of every post plugin by Corey Salzano. Contact me if you need custom WordPress plugins or website design.

Divorce , , , , ,

Interpreting the Alimony Reform Act: Surprising Developments

Alimony Reform ActSince the enactment of the Alimony Reform Act in 2011, there have been many cases which have presented questions regarding the interpretation of the statute. One frequent issue has been whether the Alimony Reform Act was intended to apply to cases which went to judgment before the Act went into effect.   Two specific issues have now been addressed.  Does the Alimony Reform Act apply to someone who was divorced in 2009 and who is seeking a modification of his/her alimony obligation on the basis of their attaining full Social Security Retirement age or due to the payee “cohabitating” as the term is defined in the law?  Following three decisions issued by the Massachusetts Supreme Judicial Court on January 30, 2015, the answer to both questions is no.

In Chin v. Merriot, Doktor v. Doktor and Rodman v. Rodman, the Supreme Judicial Court found that the Alimony Reform Act was intended to apply prospectively, rather than retroactively, except for one subset of divorce cases which went to Judgment before the act went into effect; specifically, those where the alimony orders (1) merged with the underlying Judgment of Divorce and (2) exceed the durational limits for support provided under the act (duration is based on the length of the marriage, calculated on the time between the date of marriage and the date of service on the underlying Complaint for Divorce).

For all other cases which went to judgment before the Alimony Reform Act went into effect, and where a litigant seeks modification of their prior alimony order, the Court will continue to apply the material change in circumstances standard to determine if the requested relief is warranted.  This standard has been that which was in place prior to the enactment of the Alimony Reform Act.  Using the same example as provided above, if you were divorced in 2009, ordered to pay alimony to your ex-spouse and are now seeking to modify your alimony order as a result of your reaching full Social Security retirement age, you will need to demonstrate a material change in circumstances warranting the reduction or elimination of your obligation.  Under the Alimony Reform Act, your right to relief would be automatic.  Under the old standard, you will need to demonstrate to the Court that there is need for a change, for example, as a result of your reduced income, planning for the future on a reduced income, etc.  The relief would not be presumed.  The same holds true for reducing, suspending or terminating alimony based on the payee’s cohabitation.

Please note, as has always been the case, that where an alimony provision in a Separation Agreement survives the Judgment of Divorce, the obligation is not modifiable except upon the showing of counterveiling equities (an exceedingly difficult standard to meet).  The new case law and the Alimony Reform Act do not change this.

This development is somewhat surprising given that much of the impetus behind Alimony Reform was to give relief to those individuals already paying alimony.  While not ideal, these cases do not say that those prior cases/litigants won’t be entitled to relief, just that the old standard will be applied and relief is not presumed.

If you have questions on how the Alimony Reform Act applies to your case, please call Patricia S. Fernandez & Associates. Our legal team is dedicated to helping you choose the strategy that is right for you.

Thanks for installing the Bottom of every post plugin by Corey Salzano. Contact me if you need custom WordPress plugins or website design.

Alimony , , ,

Vacating the Marital Home During the Divorce

divorce.pngIt can be surprising for a divorce client to learn that both spouses in a divorce may reside in the marital home while the action is pending.  Many people mistakenly believe that once a divorce complaint is filed, one spouse must leave the home as a matter of course.  To the contrary, for one spouse to force the other to vacate the marital home through an order of the Court, they must meet a high standard.

Understandably, it is difficult for two spouses to live together amicably during a divorce.  Many times it is a financial necessity that each knows they must endure.  Other times, spouses will refuse to move out due to their belief that it could put them at a disadvantage in the divorce. Whatever the reason may be, divorcing spouses need to understand that they cannot force their spouse out of the home because of simple annoyance or aggravation.  Living in an unpleasant situation with daily tension will likely not be enough to convince a Court that you should have sole and exclusive use of your home during the divorce.

The best route for one spouse to vacate the marital home would be to do so by agreement. If it is financially feasible, two reasonable parties should determine who will leave and who will stay. The parties should take into account who will be able to afford the home on their own during and after the divorce, and more importantly, how it affects the children, if any are involved.  In most situations, it is in the child’s best interest to stay in the home, or at the very least in the same school district.

Still, some parties simply cannot agree on who should move out. If this is the case, a court will only order one spouse to vacate if, pursuant to M.G.L. ch. 208 § 34B, “the court finds, after a hearing, that the health, safety or welfare of the moving party or any minor children residing with the parties would be endangered or substantially impaired by a failure to enter such an order.”  Furthermore, the Court only has the power to order the spouse to vacate for a period of time not to exceed 90 days.  This time can be extended upon further motion.

It is important that a spouse who wishes to file a motion to vacate the marital home understand the complexities involved in such a motion. The moving party must be able to show with specificity how their health or safety (or that of the children) is endangered or how it is substantially impaired.  The ways in which someone’s health, safety or welfare can be impaired is fact specific and is different in every case. It is extremely important to present and prepare this motion and an affidavit properly so that it does not get rejected by the court when, in fact, it should have been allowed.

If you are considering a divorce action and this issue will present itself, you should seek the advice of an experienced family attorney.  Divorce matters can be complex and overwhelming.   This is just one of the many complicated issues that the parties will encounter upon terminating their marriage. Contacting an experienced family attorney is always the best first step.

Thanks for installing the Bottom of every post plugin by Corey Salzano. Contact me if you need custom WordPress plugins or website design.

Divorce , , , ,