Pat and Jordan were married and lived in the same jointly owned home for 9 years. After their divorce, Jordan lived in the home with their three children. Now, seven years after the divorce, Jordan is selling the house and both parties are asking their respective CPAs how much of the gain may be excluded from their returns. As the professor in my corporate tax class used to say – there is an answer to every tax question: it depends.
In this sad case, these good people still cared about each other and their kids, and had what might be described as a very amicable divorce. They agreed on how the property would be divided and that Jordan would continue to live with the kids in the family home. They decided there was no need to spend gobs of money for professional fees and that their mutual understanding and cooperation would cover most situations that arose. As a result, the divorce agreement, which they signed and gave to the court was very informal and silent as to the disposition of the marital home. As far as they were concerned, this was no problem. They continued to share ownership and both contributed to the mortgage and property taxes. Jordan paid for most of the maintenance and upkeep.
What did the CPAs say about the exclusions?
As a condition for claiming the full exclusion on the sale of a principal residence a taxpayer must have, among other things, owned the property and used that property as a principal residence for at least two of the last five years. While Pat continued to own the property after the divorce, only Jordan used the property as a principal residence.
Because the divorce instrument was silent with regard to Jordan’s continued use of the marital residence, at the time of sale Jordan may claim the $250,000 but Pat gets no benefit of an exclusion and must report the entire gain. Pat no longer was eligible for the exclusion since Pat didn’t reside in the home for at least two of the past five years prior to sale.
Was there a way Pat could have also excluded $250,000 of the gain?
Yes! Special rules covering the sale of a principal residence in divorce provide that a taxpayer is treated as using the property as the taxpayer’s principal residence for any period the taxpayer has an ownership interest in the property, and the taxpayer’s former spouse is granted use of the property under a divorce or separation instrument, provided the former spouse uses the property as a principal residence. Simply by stipulating in the divorce instrument that Jordan was granted use of the property for a number of years or until some event related to the children (e.g., graduating high school, turning 18, etc.) Pat would have also been able to exclude $250,000 on an individual tax return in the year of sale.
Could the result have been even better?
Yes, again! If Jordan had been married to longtime partner Taylor for two of the five years prior to the sale, then they would have been eligible to claim a $500,000 exclusion for the sale on their joint return, while Pat would still be eligible for the $250,000 exclusion on a single taxpayer’s return.
For more information regarding Aronson’s Financial Advisory Services Practice and the forensic accounting and litigation support services we provide click here or call Sal Ambrosino at 301.231.6272.
Having payments structured as alimony can be an effective tax planning tool. Why? Because alimony is deductible by the payor (typically the higher earning spouse) and taxable to the recipient; the former family unit can reduce, often significantly, its overall tax burden. As we have been exploring in this blog series, sometimes payments the parties identified as alimony turn out to be something else…
The CPA preparing Pat’s tax returns just called to say that $96,000 of the payments made under the agreement will be presumed as child support by the IRS. Pat is dumbfounded. The payments were made according to the separation agreement; they were made in cash to the former spouse. All alimony and child support payments have been made on time. The agreement indicated that the payments were to be alimony and the parties expected that they would be deductible by Pat and taxed to Jamie.
How did this happen?
As required by the separation agreement, Pat paid Jamie $6,000 per month for three years until Taylor turned 18, then paid $4,000 per month for one year until Avery turned 18, at which time the payments were reduced to $3,500 per month.
Under these circumstances, the rebuttable presumption is that the payments in excess of $3,500 per month are deemed child support.
Certain spousal support payments (alimony) are deemed to be child support regardless of how they are described in a divorce decree or separation agreement. When a written instrument calls for a reduction in payments as a result of a contingency relating to a child, those payments will be treated as child support for income tax purposes regardless of the description in the written instrument. Examples of contingencies related to a child include the child attaining a specified age, marrying, dying, leaving school, or a similar contingency.
Careful planning may have avoided these consequences.
For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services we provide, click here or call Sal Ambrosino at 301.231.6272.
Sound familiar? The payments in post-separation Years One, Two, and Three were made according to the separation agreement; they were made in cash to the former spouse. The agreement indicated that the payments were alimony and the parties expected that they would be deductible by the payor and taxed to the recipient. The CPA preparing the payor’s tax returns for Year Three just called to say that $35,000 of the payments made in Year Two will be recaptured in Year Three as income.
How did this happen?
As required by the separation agreement, the recipient received $100,000 per year in the first and second years, respectively. In the third year, the recipient received a total of $50,000. There was no child support.
Unfortunately, the answer is an easy one. The Internal Revenue Code calls for alimony recapture if, within the first three post-separation years, payments in years two or three have decreased by more than $15,000 from the prior year. Recapture is calculated and recognized, if necessary, in the third post-separation year. The calculation is purely mathematical.
In this case:
Year 1 payments $ 100,000
Year 2 payments (100,000)
Difference $ -0-
Year 2 payments $ 100,000
Year 3 payments (50,000)
Permitted variance (15,000)
Alimony subject to recapture $ 35,000
The $35,000 deducted in Year Two as alimony must now be reported as income on the payor’s return in Year Three. Sadly, this could have been avoided with proper planning.
For more information regarding the forensic litigation support and valuation services provided by Aronson’s Financial Advisory Services Group, or for questions and assistance related to divorce click here or call Sal Ambrosino at 301.231.6272.
Often divorce decrees or separation agreements describe the nature and amount of payments and transfers to be made between divorcing individuals. Having payments structured as alimony can be an effective tax planning tool in this process. Why? Because it is deductible by the payer, which is typically the higher earning spouse and taxable to the recipient, thus reducing the former family units overall tax burden. However, sometimes payments the parties identified as alimony turn out to be something else. This blog series looks at some of the ways in which alimony can be reclassified.
First, the basics. In order to be considered alimony, payments must:
In general, if you follow the formula: have the terms in writing, be sure that the writing does not say the payments are not alimony, terminate upon the recipients death, and make the payments to or on behalf of a former spouse then in most cases the payments should qualify as alimony on the tax returns.
But what happens if the alimony payments change over time? What if the payments began prior to the creation of the written instrument? What happens if the payments are combined with child support or property transfers? Or, if the payer is behind in child support?
All of these circumstances may affect the characterization of the payments. In the following weeks we’ll look at each of these scenarios to determine how they might impact your situation.
For information on how Aronson can help you find the answers to your tax questions related to divorce, or for information regarding the forensic litigation support and valuation services provided by Aronson’s Financial Advisory Services Group, click here or call Sal Ambrosino at 301.231.6272.
Equal means equal led to the termination of Alimony in Virginia – Last week, Virginia’s Supreme Court overruled two previous lower court rulings, and determined that a same-sex relationship analogous to marriage was grounds for termination of support (Luttrell v. Cucco, Record No. 150770). The Supreme Court determined that interpreting the law to mean that “two identically-situated individuals with identical spousal awards would receive opposite treatment if one cohabits in a same-sex relationship and the other cohabits in an opposite-sex relationship” would be an untenable result.
The couple was married in 1992, separated and filed for divorce in 2007. As part of their settlement agreement, Mr. Luttrell agreed to pay monthly spousal support to Ms. Cucco for a term of 8 years which would terminate if, among other reasons, a court granted termination for cohabitation. In July 2014, Mr. Luttrell filed a motion for adjustment of the spousal support on the grounds of cohabitation. At the hearing, Ms. Cucco did not deny Mr. Luttrell’s allegations but instead pointed out that her relationship was with another woman and contended that, therefore, she was not cohabitating since both the separation agreement and the Virginia statute contemplated only a relationship between a man and a woman. The Virginia Court of Special Appeals agreed.
In 2015 the United States Supreme Court ruled in favor of same-sex marriages and in November 2015, the Virginia Supreme Court agreed to hear Mr. Luttrell’s appeal. The Virginia Supreme Court’s ruling overturning the lower court’s interpretation makes it clear that same-sex relationships are now on the same footing as opposite-sex relationships when considering cohabitation as a grounds for divorce.
In the coming weeks Aronson LLC will publish a blog series covering the tax aspects of alimony payments and the tax consequences when alimony payments are re-characterized as child support or distributions of property.
For information on how Aronson can provide assistance in estate, trust and marital disputes click here or contact Sal Ambrosino at 301.231.6272.