TAXES
ON COLORADO DIVORCE PAYMENTS
TAXES
ON COLORADO DIVORCE PAYMENTS
|
 TAXES
ISSUES ON ALIMONY
PAYMENTS IN COLORADO DIVORCEAfter fourteen years
experience in a Colorado divorce practice and one of the best divorce
lawyers in the Denver metro area, have this to say about the interplay of
tax considerations and a Colorado divorce: Cut
along the moral and financial seams of the divorce, don’t get cute with
tax games. It can bite you in the butt. Generally, alimony/maintenance is deductible to the payor and taxed as income to the payee. So, tax wise in a divorce, when it comes to maintenance, it is truly better to give than to receive. Care should be taken not to "front load" alimony payments or otherwise the IRS may challenge the deduction as a disguised property distribution. While maintenance is deductible to the payor, child support is not. Again, caution should be used in trying to characterize payments as maintenance that are contingent on events in the child's life: e.g. -- attaining the age of majority. The first rule is that any reduction of maintenance within 6 months of a child’s 18th or 21st birthday will be considered change of child support. Secondly when there are multiple children and multiple reductions of maintenance, any reduction within any one year of any child’s 18 through 24th birthday will be considered a reduction of child support. In the event the IRS catches you, it can go back six years in disallowing the deductions. The tax implications of any given asset should always be considered when divvying up marital property. $100,000 of recently purchased mutual funds is not the same as a vacant lot valued at $100,000 purchased 10 years ago and having a $5,000 cost basis. Both are different from $100,000 in after tax cash in the bank account. A little something thrown in about bankruptcy (no extra charge). Lest one get all wrapped up in the tax implications of calling a distribution one thing or another the parties, especially the receiving spouse, should be mindful of what would happen if things fall apart. Basically: obligations arising from an undistributed property settlement are dischargeable in bankruptcy (that is, if the receiving spouse has not received it, he or she is out of luck). Now, a receiving spouse may ask himself or herself, "How in the world can a property distribution be so drawn out that significant assets are undistributed some time later, when the bankruptcy is filed?" One answer is: see the discussion about characterizing what is in reality a property distribution as maintenance. While it might cut the muster as maintenance with the IRS, a bankruptcy judge may, in his discretion, call it a property distribution, and therefore dischargeable in bankruptcy. i.e. the receiving spouse now gets nothing. The moral of this tale is always be aware of the tax consequences, but don't let them drive the settlement agreement. Get what you can up front. Avoid, if possible, delayed distribution.
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