Insight

Clients Should Understand Basic Financial Consequences of a Divorce

Spouses who get divorced will have to adjust how they file their taxes, what income and liabilities they must report for tax purposes, and even how they approach discussions about alimony and spousal support.

Divorce Finances
SF

Steven Fernandez

October 10, 2017 11:25 AM

A divorce can be a complicated process. All too often, clients are focused on getting “more” out of the divorce than their spouse. This can cloud judgment and make it difficult to achieve a successful and meaningful resolution in a divorce. It is important to talk with clients about the tax and financial consequences of a divorce. Clients should be aware of how “getting more” in the divorce could ultimately be problematic. As family law and divorce lawyers, it is our responsibility to make sure that clients approach divorce discussions with as much information as possible.

Taxes aren’t the most exciting topic of discussion.

However, tax implications are inherently intertwined in a divorce proceeding. Spouses who get divorced will have to adjust how they file their taxes, what income and liabilities they must report for tax purposes, and even how they approach discussions about alimony and spousal support.

Clients will often be guided and driven by emotion. It is important to insert some objective considerations into the equation.

The Ability to Claim Dependents

Spouses will likely have to change their tax return filing status in the future. This, of course, will depend on whether the spouses remarry right away and if parents retain the right to claim any children as dependents. The ability to claim dependents on a tax return can be incredibly beneficial. It can allow for additional deductions and credits and can significantly reduce a parent’s tax liability. In some cases, parents can qualify for refunds that may have otherwise been out of the question.

If your client would not necessarily benefit from claiming his/her child on a future income tax return—perhaps because they have a high income or can claim other children from a previous relationship—they may be able to use the deduction as a bargaining chip. While your client may not want to give up the deduction for personal reasons, it may be beneficial to offer future deductions in exchange for receiving another benefit in the divorce. Spouses who understand the underlying financial implications of their decisions may be more likely to approach divorce settlement negotiations with an open mind.

Taxation and Future Financial Consequences of Marital Assets

The way in which property is distributed in a divorce often depends on the state in which the couple resides and whether or not there is a prenuptial agreement. Spouses who want to get divorced should consider how these factors will impact their ability to divide their marital assets.

All but nine states use equitable distribution laws. When a divorce is contested in these states, the court will step in and determine how property should be divided. This allocation will not necessarily be equal. Rather, it will be equitable. The court will consider what is fair and reasonable after considering a number of relevant factors. Spouses who divorce inequitable distribution states could potentially be awarded all of the marital property, none of the marital property, or any percentage in between. When spouses divorce in community property states, each is entitled to half of the community marital property. This division is equal rather than equitable.

Spouses who anticipate that a divorce may not be amicable and want to maintain some control over the division of property can execute a prenuptial agreement. In a prenuptial agreement, spouses pre-determine how property, assets, debts, and liabilities will be divided in a divorce. This can be general (“each spouse shall receive 50 percent of the marital assets and liabilities) or specific (“Spouse A shall get the house; Spouse B shall get the car”). Spouses who execute prenuptial agreements often take the tax consequences of distribution into consideration. It may be wise to discuss a prenuptial agreement with clients who are thinking about getting married or a postnuptial agreement with spouses who are already married.

Spouses who refuse to come to a mutually-agreeable resolution to property division risk leaving important decisions to the court. While most property transfers in a divorce are not taxable, the property that each spouse receives may have its own unique tax consequences. For example, if your client wants to get everything in a divorce and leave his/her spouse with nothing, they must realize that they will be on the hook for payments related to any property they receive. If your client wants the house, it is important to emphasize that he/she will be responsible for property taxes, mortgage payments, and other home-related costs. If your client wants everything, they must also know that they will be responsible for resulting taxes, fees, and expenses as well. Getting “more” can come with a hefty price tag down the line. Since most divorce-related transfers are not taxable, now may be the time to discuss what is best for both spouses in the future, rather than what will be self-satisfying in the moment.

Alimony and Spousal Support

Alimony is generally both included in the recipient spouse’s income and a deductible expense for the payor spouse. Even the discussion of alimony can trigger tense emotions and distress in a divorce. However, it is important to understand the tax implications of alimony and spousal support. These can help to guide conversations and establish appropriate payments. Spouses who will be required to pay alimony may want to establish higher alimony payments in exchange for receiving less marital property. This would allow the spouse the best tax position. The spouse who is entitled to receive alimony may want to receive less in alimony and more in marital assets. Marital assets may not have immediate tax consequences, whereas alimony will have to be included as income. Spouses can use alimony as a device to negotiate the division of property and allocation of dependents.

There are many issues that should be taken into consideration when approaching the division of assets, child custody, and alimony in a divorce. Spouses should understand the tax and financial consequences of any decisions they make in a divorce. These decisions should not be guided by emotion, but rather logical thought and foresight.

---------------------------

Steven Fernandez is an attorney and founder of Fernandez & Karney, a Los Angeles family law firm. Mr. Fernandez is a graduate of University of California – Los Angeles School of Law, is a California certified family law specialist, and has over 27 years’ experience exclusively handling family law matters.

Phone: 310-393-0236
Email: info@cfli.com


Related Articles

The Advantages of Collaborative Divorce for Families


by Best Lawyers

Collaborative divorce is a cooperative alternative to a possibly contentious, court-focused divorce process. Learn more about collaborative divorce here.

Silhouetted figures split down the middle with child in backdrop

Important Considerations in Determining What Is in the Best Interest of a Child


by Hossein Berenji

When courts make determinations about child custody they will make the decision based on what they believe is in the best interest of the child.

Best Interest of a Child

How To Find a Good Divorce Lawyer


by Best Lawyers

To navigate a divorce, which is inherently a complex legal landscape, finding the right divorce lawyer can make all the difference in the outcome of any case.

Bride and groom figurines on top of a wedding cake

The Top 7 Things to Know Before Filing for Divorce


by Best Lawyers

Consulting with a qualified divorce attorney can help you understand your rights and obligations when filing for divorce. Here are 7 things you should know.

Two golden wedding bands with a crack down the middle

Split Decisions


by Jonathan Merel

Divorce is inevitably fraught with a torrent of emotions on both sides. Don’t let this occlude your ability to plan rationally and dispassionately to ensure as smooth a process as possible. Here are five common pitfalls to avoid.

Two people standing on either side of a heart made out of curving roads

What If Johnny Depp and Amber Heard Had a Premarital Agreement?


by John M. Goralka

Oh, the gritty details we’re learning from the latest court battle between Johnny Depp and Amber Heard. This unfortunate airing of dirty laundry may have been avoided with a prenup. Should you think about getting one yourself?

What If Johnny Depp & Amber Heard Had Prenup?

Announcing the 2022 Best Lawyers: Family Law Publication


by Best Lawyers

Featuring the top legal talent in Family Law and Trusts & Estates.

Announcing Best Lawyers Family Law 2022

Crossing the Line


by Joseph Trotti

Divorce can be difficult, complicated and emotionally exhausting. Divorcing across state lines ups the jurisdictional complexity significantly.

Jurisdiction and Divorce Across State Lines

Trouble at Home


by Brittney M. Miller and James J. Vedder

Decisions about custody and parenting time after a separation or divorce are never simple. Family violence of any kind makes the process all the more complex—and the victim isn’t always the beneficiary.

How Domestic Violence Complicates Custody

Prenuptial Peril


by Laura Wheatman Hill

Prenups aren’t always bulletproof, but there’s hope if you end up exposed in a divorce.

Why Your Prenup Might Not Save You

My Husband Didn’t Want to Stay Married…But He Didn’t Want a Divorce


by Jennifer Billock

Patience—and the law—prevails when an uncooperative partner avoids divorce proceedings.

Divorcing an Uncooperative Partner

My Lawyer Failed Me as an Advocate in My Parents’ Divorce


by Rebecca Rush

Here’s how to ensure your children are respected during a custody battle.

Representing Children in a Divorce

Marriage, Mortgages, and Millennials


by Angelica Rolong Cormier

More and more couples nowadays are cohabitating before marriage. But how does reimbursement claims work if a divorce happens?

Reimbursement Claims for Properties During a

What Happens to Credit Card Debt When I Get a Divorce?


by Hossein Berenji

In a community property state like California, credit card debt may be shared between partners.

Credit Card Debt After Divorce

New Year Ushers in New Formulas for Calculating Maintenance Payments in Divorce Proceedings


by Timothy E. Weiler

The anticipated outcome of the adoption of the increased income threshold is to reduce litigation about the amount of maintenance to be paid by simply applying the statutorily mandated calculation to more individuals with a much higher annual income.

Maintenance Payments

Illinois’ Pet Owners Can Now Seek Custody of Their Pets in Divorce Proceedings


by Weiler & Lengle

PA 100-0422 now requires a divorce judge to award one party or the other possession of and responsibility for the family pet or pets based upon a careful consideration of the animal’s “well-being.”

Pet Custody in Divorces

Trending Articles

The 2024 Best Lawyers in Spain™


by Best Lawyers

Best Lawyers is honored to announce the 16th edition of The Best Lawyers in Spain™ and the third edition of Best Lawyers: Ones to Watch in Spain™ for 2024.

Tall buildings and rushing traffic against clouds and sun in sky

Best Lawyers Expands Chilean 2024 Awards


by Best Lawyers

Best Lawyers is pleased to announce the 14th edition of The Best Lawyers in Chile™ and the inaugural edition of Best Lawyers: Ones to Watch in Chile™, honoring the top lawyers and firms conferred on by their Chilean peers.

Landscape of city in Chile

The Best Lawyers in Spain™ 2023


by Best Lawyers

Announcing Spain's recognized lawyers for 2023.

Flag of Spain

Announcing The Best Lawyers in South Africa™ 2024


by Best Lawyers

Best Lawyers is excited to announce the landmark 15th edition of The Best Lawyers in South Africa™ for 2024, including the exclusive "Law Firm of the Year" awards.

Sky view of South Africa town and waterways

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

The Best Lawyers in Portugal™ 2024


by Best Lawyers

The 2024 awards for Portugal include the 14th edition of The Best Lawyers in Portugal™ and 2nd edition of Best Lawyers: Ones to Watch in Portugal™.

City and beach with green water and blue sky

The Best Lawyers in Peru™ 2024


by Best Lawyers

Best Lawyers is excited to announce the landmark 10th edition of The Best Lawyers in Peru, the prestigious award recognizing the country's lop legal talent.

Landscape of Peru city with cliffside and ocean

The Best Lawyers in South Africa™ 2023


by Best Lawyers

Best Lawyers proudly announces lawyers recognized in South Africa for 2023.

South African flag

The Best Lawyers in Chile™ 2023


by Best Lawyers

The results include an elite field of top lawyers and firms in Chile.

White star in blue box beside white box with red box on bottom

The Best Lawyers in Colombia™ 2024


by Best Lawyers

Best Lawyers is honored to announce the 14th edition of The Best Lawyers in Colombia™ for 2024, which honors Colombia's most esteemed lawyers and law firms.

Cityscape of Colombia with blue cloudy sky above

Announcing the 2024 Best Lawyers in Puerto Rico™


by Best Lawyers

Best Lawyers is proud to announce the 11th edition of The Best Lawyers in Puerto Rico™, honoring the top lawyers and firms across the country for 2024.

View of Puerto Rico city from the ocean

The 2023 Best Lawyers in Portugal™


by Best Lawyers

Announcing the elite group of lawyers recognized in Portugal for 2023.

Green and red Portuguese flag

Unwrapping Shrinkflation


by Justin Smulison

Through the lens of the United States, we take a closer look at the global implication of companies downsizing products while maintaining and often raising prices.

Chocolate bar being unwrapped from foil

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

2021 Best Lawyers: The Global Issue


by Best Lawyers

The 2021 Global Issue features top legal talent from the most recent editions of Best Lawyers and Best Lawyers: Ones to Watch worldwide.

2021 Best Lawyers: The Global Issue

Announcing the 2023 The Best Lawyers in Canada Honorees


by Best Lawyers

The Best Lawyers in Canada™ is entering its 17th edition for 2023. We highlight the elite lawyers awarded this year.

Red map of Canada with white lines and dots