I’m not a tax attorney. In fact, if I’m being 100% honest, I really don’t know all that much about tax law, except that it is complex and constantly changing. As a family law attorney, though, sometimes tax related issues come up in my practice. Though I don’t pretend to understand everything about tax law (in fact, far, far from it), I do know a couple of things.
If you’re preparing to go through a divorce (or even a custody case), there are a couple of things that I CAN tell you about tax law. (For anything else, beyond my scope of expertise, you should just call up a tax attorney directly. In fact, in the case of a divorce, it’s something that I sincerely recommend that you do at some point, regardless of whether my information answers all of your questions today.)
In fact, there are 4 things about tax that I can tell you.
1. Spousal support is taxable to you (assuming that you’re the party who is receiving it), and tax deductible to your husband (assuming that he is the party who is paying ).
Spousal support is income so, if you’re receiving it, you’ll have to pay taxes on it. That’s something to consider when you’re negotiating (or litigating) on the issue of spousal support. It’s also tax deductible to your husband.
Is there a way to get around that? Probably not. Because the fact that spousal support is tax deductible to the person paying it is really the only tangible benefit to the payor spouse, he (assuming he is the one paying support, rather than you) is unlikely to agree to any scenario that doesn’t allow him to claim that deduction.
There are very few things, though, that we can’t negotiate away in an agreement. There is a provision in the IRS Code that allows us to draft a provision in a Separation Agreement that removes his ability to claim your spousal support award as a deduction on his taxes. Of course, the question is… Will he sign it? If he’s represented by an attorney, chances are slim and none.
2. Child support is the opposite. It is NOT tax deductible to him (assuming, again, that he is the party who is paying), nor is it taxable to you (assuming that you’re the one receiving child support).
There’s no negotiating on this point. Child support is not taxable or tax deductible, no matter what you may wish to put in your agreement.
3. You can’t double deduct.
It’s fairly common that, in lieu of paying spousal support, the payor spouse will pay the mortgage instead. Spousal support is tax deductible, like we’ve already said—but, then again, so is the mortgage interest.
You can’t double deduct, so, if your husband is the payor spouse, he can’t deduct both the spousal support and also take the mortgage interest deduction. In a case like that, your husband, assuming he’s the payor spouse, can deduct for paying you spousal support, but you get to claim the mortgage interest deduction.
It’s like he paid the mortgage money directly to you, and then you turned around and paid the mortgage—even if, in your case, it doesn’t involve so many steps. The IRS won’t let him deduct both for the spousal support and then for the mortgage interest when it’s the same money. Makes sense, right?
4. Cash settlements aren’t taxable. (Because you already paid tax on it!)
If you get, for example, $50,000 from the sale of your house, you don’t have to pay taxes on it. You’ve already paid taxes on whatever-it-was when you earned, purchased, or acquired it.
Lots of tax issues can arise in a divorce case and, if yours is one where you’re wondering about what the possible implications could be, it’s a good idea to talk to a tax attorney or a CPA before you make any decisions.
For more information, or to schedule a time to talk to one of our licensed and experienced Virginia divorce attorneys, give our office a call at (757) 425-5200.