So it is my wife’s birthday this week.  Cleverly, I gave her a gift certificate to Victoria’s Secret, thinking that the gift would be a gift for both of us.  To my bitter disappointment, she bought 2 sets of flannel pajamas for the winter.  The kind with feet in them.  Ugh…

Today, let’s continue with the second of a three part series on federal tax issues that may arise in a divorce proceeding.  Last week we addressed the high rate of divorce in our society, the need to set aside emotional hostility and focus on resolving issues to minimize damage to the family, and the possibility of innocent spouse treatment and how it may affect the divorce decree.

Here are some additional tax issues to consider:

  1. Community Property

Texas and several other states have enacted community property laws.  There are many features of these laws, but one such feature that I want to focus on is this:  the income earned by either spouse during the marriage is owned equally by the other.  From a federal tax point of view, that also means that you can be taxed on half of the income earned by the other spouse even if you didn’t know about it or receive any benefit from it.  This is a nightmare scenario if you become divorced, and the other spouse is audited and unreported income is discovered.

The community property laws also provide that separate property  (assets you brought into the marriage, gifts during the marriage, etc.) that is comingled with other property can become community property and thereby subject to the debts (including taxes) of the other spouse.  This too can be a nightmare scenario if not properly planned for.

There are a variety of ways to avoid these pitfalls, but you need to consult with a family law attorney and protect yourself and your children.

  1. Alimony and Child Support

The tax treatment of child support and alimony is very different.  One may be taxable, and the other may not be.  One may be deductible and the other not.  In addition, the IRS may seize one of them but may be reluctant or unable to seize the other.  As a consequence, something that seems simple and routine, i.e., how to categorize payments made during and after the divorce, can really have very significant tax consequences.

These issues can be easily handled if properly planned for. And they can be handled before or after the marriage occurs; however it is essential that planning be done before the Internal Revenue Service becomes involved.  Take the time to consult with your family law attorney.  Also, you don’t need to delay a marriage for fear of the IRS—you just need to plan for the issue now and solve it with the help of competent counsel.

  1. Dependency deductions

The federal tax law allows divorcing spouses to enter into a written agreement as to which spouse will receive the dependency deduction. If the high income earning parent receives that dependency deduction, there may be a significant tax savings available.

Unfortunately, it has been my experience over many years of law practice that the financial and tax issues involved in divorces are oftentimes not properly considered beforehand for inclusion in the divorce decree.  Divorces are difficult and painful enough without additional problems created by poor financial and tax planning.

Incidentally, I have told my wife that in the unlikely event of any domestic issues between us, she can keep the flannel feet pajamas as a part of her separate property!