Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 31, 1995 TAG: 9507310017
SECTION: BUSINESS PAGE: A6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Taxes figure in setting levels of alimony and child support, according to Valerie Kowalski, a certified public accountant with the Roanoke firm of Kowalski & Associates. But they are important as well in reaching an equitable division of assets.
Kowalski said transfers of property between spouses, or resulting from their divorce, have two characteristics.
First, she said, neither the spouse transferring assets nor the partner receiving them has any gain or loss on the transfer.
Also, the receiving spouse's tax basis in the property is the same as the transferring spouse's basis before the transfer.
The transfer is considered as resulting from a divorce, Kowalski said, if it occurs within one year after the date on which the marriage ends. Or it may be incidental to a divorce if it is related to the ending of the marriage through a divorce or a separation decree and occurs within six years after the date the marriage ends.
When the low basis of the property is involved, tax consequences of a future sale should be considered.
Kowalski cited the example of a husband who transfers to a wife his half of their jointly owned home. Capital gains deferred in the past reduce the tax-basis value of the house. If the wife sells the house, her basis could be low enough to create a significant bill for capital gains tax.
Thus, Kowalski said, the after-tax cash proceeds should be calculated before the sale of any asset acquired through a property transfer pursuant to a divorce agreement.
She recommended that anyone involved in a divorce consult a certified public accountant. She said courts in Virginia are required to consider the tax consequences of a property settlement. The tax liability can significantly affect the real value of the property transfer.
A "qualified domestic relations order" may be used to assign a portion of qualified retirement plans so that the spouse to whom the benefits are assigned will have the same tax consequences as the spouse who was the original plan participant, Kowalski said. If the order is not properly executed, she warned, the transfer or assignment of such benefits may create a significant tax burden on the spouse who receives them in a settlement.
In the matter of tax exemptions for dependents, she said, the spouse who gets custody of children, for example, is entitled to those tax benefits in divorces filed after 1984. To transfer those exemptions to the noncustodial parent, use IRS Form 8332.
The child-care credit, however, is available only to the custodial parent. Medical expenses are deductible by the parent who pays them.
Those with dependent children should investigate whether they qualify to file tax returns as a head of household, Kowalski said.
Alimony and child support, she said, have differing tax consequences.
Alimony is taxable for the spouse receiving the money and deductible for the paying party. Child support, on the other hand, is not taxable to the receiving spouse and is not deductible by the paying spouse. Kowalski said rules differ between pre- and post-1984 divorces.
Kowalski said payments may be considered child support if the divorce or settlement agreement provides for a reduction in a payment when the child reaches the age of majority, dies, marries, finishes school, leaves the household, reaches a specified income level or becomes employed.
The government will move to recapture any deductions for alimony if it believes the rules were violated. This is designed to prevent divorcing parties from disguising property settlement payments as alimony, Kowalski said. The recapture may be triggered if, during the first three years, the first- or second-year payments are substantially larger than the third-year payment.
\ IS IT ALIMONY?
To be treated as alimony for federal tax purposes, Kowalski said, payments must meet this list of criteria:
Payment of alimony must be made under a written divorce or separation agreement.
Spouses cannot live in the same household after the divorce or separation agreement is final.
The payments must be made in cash or cash equivalents, such as certificates of deposit.
The money must be paid to, or on behalf of, the receiving spouse.
The divorce or separation agreement cannot state that payments are anything other than alimony, such as a property settlement.
The paying and receiving spouses must file separate income tax returns.
The payments must stop at the death of the receiving spouse.
The payments must not be called or deemed to be child support.
by CNB