Chicago Metro Area Family Tax Lawyer

As with any other matter in life, taxation is an important issue in a divorce or dissolution. In most cases, a transfer between parties is considered to be a non taxable transaction so that the basis of the asset will remain the same for the party acquiring it at the time of the dissolution as it was just before the transfer. The transfer will not be taxed, though the sale of the asset by the party acquiring the asset will be taxed.

General tax rules are as follows:

a. Maintenance is deductible to the party paying it and taxable to the recipient.

b. Most Erisa approved plans will be taxed upon transfer unless a Qualified Domestic Relations Order is entered that complies with IRS tax laws. No such order is needed for the transfer of an IRA providing the proceeds are put into an IRA of the receiving spouse.

c. If both parties reside at the marital home, each party can exempt $250,000 of the net sale profits from taxation. This means that $500,000 of profits can be sheltered if the judgment or settlement agreement is structured properly. It should be noted that in most cases, the basis in your house will be the purchase price plus capital expenditures minus the capital gain from the previous sales of homes that have not been paid or deferred.

d. The tax consequences of an asset should be considered. A house that can be sold for less that a $250,000 profit is worth more since it isn?t taxed than a stock in which capital gain taxes are paid on the net profit. A stock that is not a capital asset is normally worth less than a capital asset since it is taxed at ordinary income rates. An Erisa retirement plan is worth less than most assets since it is taxed at ordinary income rates and can?t be used until the owner turns 55 without being subject to an additional 10% tax penalty.

Certain agreements are structured with specific tax objectives. For example when one parent earns substantially more money that the other and will be paying maintenance, the parties might agree that no child support be paid. This is called unallocated maintenance. The concept calls for payment of a greater amount of maintenance than what child support and maintenance would normally be. The additional payment would fund the added taxes to the recipient. The payment would give the recipient more after tax dollars than what would be received with a combined support and maintenance payment. The payor spouse also have more after tax income since the payments are fully deductible. This occurs because the tax rate of the recipient spouse is less than the tax rate of the payor spouse.

Robert Lewinthal has a L.L.M. in taxation and has been trained to deal with the tax issues.