Academic journal article Journal of Accountancy

Divorce Settlement Issues

Academic journal article Journal of Accountancy

Divorce Settlement Issues

Article excerpt

How can you assist your client and the client's attorney in realizing a fair and equitable divorce settlement? Here are several critical tax and financial planning issues:

[check] Consider the benefits of a qualified domestic relations order (QDRO). If your client must distribute all or a portion of his or her retirement account to a former spouse, pay attention to the tax benefits of a QDRO (see IRC [section] 414(p)). Section 402(e)(1)(A) provides for the income tax to be assessed to the alternate payee (that is, the former spouse) and not to the plan participant when payments are made under a QDRO.

[check] If a principal residence is part of the matrimonial estate, review section 121(d)(3). You may save on capital gain on the sale of the residence. When calculating use of the residence for purposes of the exclusion of gain from the sale of a principal residence, the deemed-use provision provides that "an individual shall be treated as using property as such individual's principal residence during any period of ownership while such individual's spouse or former spouse is granted use of the property under a divorce or separation instrument."

[check] Review current and prior tax filings for loss carryovers. The tax savings constitute marital property and should be properly quantified by the CPA.

[check] Beware of alimony recapture. Review the alimony decree to avoid the potentially devastating consequences for the payor under section 71(f) of excessively front-loading alimony payments. IRS Publication 504, Divorced or Separated Individuals, provides an illustration of excess alimony payments and the resulting recapture of payor deductions. Also, for payments to qualify as alimony under section 71(b)(1)(D), there can be no liability for payments after the payee spouse's death.

[check] Insure the alimony payments. Insure the payor spouse, since alimony payments otherwise will cease upon that person's death or may cease upon disability.

[check] Evaluate any innocent spouse claim. …

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