Why You Should Consult a Tax Attorney before filing for Divorce

It is understandable that most people who are contemplating divorce or separation from their significant other, are not surely worried about the tax consequences that will come along with it. It seems that people are not informed on this subject as much as they should be. This article will provide an overview that we believe is necessary for anyone seeking a divorce.

A divorce can be very messy especially if it involves children. Under the old tax rules prior to the passage of the TCJA most Tax attorneys help guide clients in the complicated field of Alimony payment structuring and making sure that child support did not interfere or be considered as part of a settled alimony or spousal support payment. As the IRS would eventually find that if the Alimony payments were structed in such a manner that it would end at some period around the child’s 19 birthday, it would disallow the alimony deductions which could cause more of a headache for the payor than the tax savings of hiding such payments inside spousal support payments.

The TCJA got rid of this and now alimony is not deductible. So, you say to yourself why do I need to see a tax attorney then.

A tax attorney helps plan tax saving models to help large and small business save large sums of money on their tax bill. This makes a tax attorney an ally that can provide not only the guidance for the ramifications of divorce (Especially in California with community Property laws) a smoother transition so your not hit with a large tax bill after divorcing your significant other.

A lot of factors come into tax planning for divorce, such as what assets or liabilities you should be taking on. Should you move towards the model of accepting more cash up front and giving up stakes in 401Ks and other future retirement safety nests or plan for the future and take on more liability.

Further complications begin to develop with clients that have businesses that are owned by spouses or one spouse is a passive involvement in such business. This could lead to often overlooked tax consequences that can harm you after a divorce that is settled. Leading to old wounds being open back up and going back to litigating the tax consequence to either the IRS, the FTB and even criminal prosecution.

For example, your spouse owns a successful business and during this time neither of you can imagine being divorced or separated. But life being the way it is anything is possible. Your spouse has you as a member of the entity that operates the Business or be a passive limited partner/member/shareholder in the entity. One issue that can arise is that by the time the divorce settlement has been reached and over that six months or maybe years that the separation is finalized, the entity keeps filing K-1’s/ or corporate returns in your name and large tax liabilities could develop for you, even if you have not received any actual money. These K-1’s or other tax return filings that are being issued in your name with no benefit of receiving the pass-thru income  are called  “Ghost K-1’s”. Then one day go and open your mailbox and see addressed to you a letter from the IRS and as most people who are not one that has ever dealt with the Service you begin to panic. You open the letter and states  you have unreported income and you now  have a large tax liability, but you start to think to  yourself that you haven’t received any cash distributions or physical money from the business as you are divorcing your spouse and have not seen him/her other than in court appointed mediations or hearings.

Other issues that may develop following your separation from your spouse include but not limited to:

1- Former spouse filed returns jointly and did not pay the portion of taxes he/she was responsible for.

2- Former spouse never made the property tax payments from your joint account and now owe large sums plus penalties to the county.

3- Commingling of separate income that could lead to a possible tax liability.

4- Former spouse transferring funds or having funds transferred to your personal account so he/she may not  have to report the income on his or her tax return.

5- Not retaining a tax attorney prior to marriage to plan accordingly.

That is why it is important to contact a tax attorney not only to help guide you through this difficult time but to make sure you are not in for any surprises after the fact. K and S Law Group has helped guide clients during their divorce and separation agreements in Orange County and Los Angeles. The tax attorney’s at K and S Law Group will help guide you during this difficult time with prudent financial decisions, apportionment of income issues, and tax liability you may owe due to filing jointly with your former spouse. Contact our Law Firm today at (800) 982-3880

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