Yes, there is a specialty of Divorce Tax Planning. But why, you ask?
For example, if a property settlement involves capital assets, an unsuspecting spouse might obtain an asset that has been depreciated. If this is the case, the recipient spouse has a built in taxable gain. Worse yet are the depreciation recapture provisions. What appears to be a 50/50 split is not so.
Similar is the case with deferred tax income property. There are many, many tax traps in divorce settlements. Likewise, there are many opportunities to take optimize the tax code during the course of a divorce.
Most people only obtain appraisals. A property’s fair market value is only part of the picture. The property’s tax attributes are the other part. This is where I come in.
Many years ago, I tried to repair a taxable event where a spouse received over a million U.S. in her bank account for a fleeting moment. Receipt of money is a tax recognition event. It was in the context of a corporate dissolution and divorce. What appeared to be harmless turned out to be a very large and unexpected tax bill. This is more common than you might imagine. I will also add that both spouses were represented by large prestigious law firms. Tax law takes no prisoners.
If you are involved in a divorce and have assets worth worrying about, I can review the proposed distribution to ensure an equitable tax result.
*In addition, if you intend on filing for Innocent Spouse Relief after the divorce is final, I can review the proposed court order, stipulation, or settlement agreement to ensure that certain key tax provisions are contained in it.
Divorce attorneys are very good at what they do, I have witnessed. They have a lot to keep their eye on. It is very prudent for wealthy individuals with high net worth estates to obtain competent tax counsel. It can save thousands and headaches. For example, post divorce taxpayers will finally separate their finances. Consistency among their tax returns is important. inconsistencies can and probably will raise IRS issues and possibly an audit.
In general, alimony is deduction by the payor, and inclusion by recipient. If you are the payor, it is a deduction on the first page of the 1040, line 31a, which is a very favorable position.
There may be optimizations to classify property settlements as alimony, depending on the drafting of the stipulation, court order, and also timing of payments.
IRC §71(f) seeks to prevent such classifications.
Prenuptial Due Diligence
If you are getting married to an individual who is a bit older or who runs a small business I dare say that it is prudent to run a tax compliance check-up. You can ferret out hidden tax problems before marrying the individual.