Divorce can be devastating on multiple levels—especially financially. Getting through the process and back on your feet can take time. In this situation, it’s not uncommon for family members to help out by providing extra funds. Depending on the circumstances, someone’s family support could be a temporary measure or ongoing. Additionally, some family “gifts” operate more like recurring income. If you or your ex are getting supplemental financial assistance from family, you will want to know: Can in-law gifts and support be considered during my California divorce? Continue reading
Marriage is a beautiful thing, and for some people, it is the key to long-lasting happiness and even personal wealth. But even the beauty of marriage can wilt and wither, and what was once a happy flourishing relationship can turn to separation and divorce. In those cases, no amount of money can buy back the happiness of the relationship, and the division of property that is the marker of a relationship ended ensues. When a marriage ends, it often brings with it issues of spousal support – and that spousal support can take different forms.
Alimony is the form of spousal support that most people are familiar with – it is the payment if funds from one spouse to the other for ongoing maintenance. Alimony is designed to allow a recipient spouse to take care of himself or herself. Property settlement, on the other hand, is the division of the assets of the marriage. It is the separation of those things that the marriage has jointly acquired between the two individuals as they move in separate directions.
These two concepts seem similar but have different consequences for tax purposes. Generally speaking, property settlement has few to no tax consequences. Alimony, on the other hand, is taxable as income to the receiving party and deductible as an expense by the paying party. The different treatment does not change whether you are dealing with a multi-million dollar marriage or something much smaller, though the tax amount varies considerably.
The recent Enron case interestingly has even touched the world of divorce and the separation of property with that goes along with it. Byron Georgiou, an attorney associated with the case, entered into a divorce just prior to the completion of that case. Pursuant to the divorce agreement, his ex-wife was to be entitled to 10% of the fees he received from the case. When the case settled, Byron was awarded $55 million in fees. His ex-wife, Maria Leslie, was therefore entitled to $5 million. The language of the marital settlement agreement had placed the provision related to the fee award in the section of the agreement related to division of property. It then used language that clearly identified it as spousal support that was intended to be taxable income for the wife.
The responsibility to pay taxes is a serious one, and the United States Tax Court does not make exceptions based on mental health or divorce. Ms. Leslie was recently in front of them for failure to pay taxes. She had multiple arguments regarding the amount of taxes she was due and for which tax year. Leslie had been scammed for $400,000.00 in an African diamond scam, and the issues before the court related to whether the funds were intended as spousal support or were instead a division of marital property.
Leslie was fortunate to have the court find that money she had been swindled in the scam was properly considered a theft loss that she could legally write off. However, the court also found that the income she received from her ex-husband’s participation in the Enron litigation was taxable income to her. The court found that the language in the agreement identified it as such, even though it was in the section of the agreement on property settlement and even though it did not include any provision for termination at the time of her death.
Teasing out whether support is intended to serve as alimony or as a property settlement can have major consequences for both spouses. That’s one of the reasons it’s so important to make sure your divorce papers are handled by an experienced attorney who is an expert in California divorce law. Contact the attorneys at the Law Offices of Judy L. Burger today to learn how our attorneys can help in your case: (415) 293-8314.
If you are newly divorced or going through a divorce, you may be unsure how the Internal Revenue Service treats spousal support for tax purposes. Many people do not think about taxes until tax time rolls around. Of course, it is wise to be prepared on this issue, as receiving (or paying) spousal support will affect your tax bill and potentially lead to an underpayment that you will need to make up by April 15.
The Internal Revenue Service (IRS) treat spousal support, also called “alimony,” as income for federal tax purposes. The most important issue is what qualifies as alimony under federal tax law.
- The parties do not file a joint return.
- The payments are made in cash, by check, or by money order.
- The payment is received either by the ex-spouse or on that person’s behalf.
- Neither the parties’ separation agreement nor a court decree says that the payment is not spousal support.
- The responsibility to make the payments stops when the ex-spouse dies or remarries.
- The payment is neither child support nor part of the parties’ property settlement.
- child support;
- property settlements that are not made in cash;
- payments that are intended to be a spouse’s share of community property income; and
- payments made either to keep up or for the use of the paying spouse’s property.
The former spouse who receives the payments is required to report alimony as income for federal tax purposes. Likewise, the former spouse who makes alimony payments is entitled to a deduction for payments made.
Those who receive payments are required by law to cooperate by providing their Social Security number to the paying party. If receiving spouses do not do this, they may receive a $50 penalty. A party making the payments could not only receive a $50 penalty for failing to include the recipient’s Social Security number but also could see his or her income tax deduction disallowed.
Here are a few trickier situations that require competent financial or legal advice:
- payments made to a third-party under a separation agreement, a divorce decree, or at the written request of the receiving party;
- payments for life insurance premiums for the benefit of the receiving spouse, if they are required by court order or a written separation agreement; and
- certain mortgage, real estate tax, or house insurance payments.
- Using legal discovery methods to gain information about the former spouse’s assets. Before attempting to collect, we’ll need to know what assets he or she has that may be subject to levy or seizure.
- Placing a lien on the delinquent payer’s real estate.
- Placing a lien on the delinquent payer’s personal property.
- Seeking an Earnings Withholding Order to get part of the delinquent payer’s wages directly from his or her employer.
- Seeking to levy the delinquent payer’s bank accounts.