Tax Planning in Grey Divorce

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Grey divorce involves individuals over the age of 50 who are ending a marriage.  Because many people over the age of 50 thought they would be retiring sooner rather than later, divorce often means new financial plans are necessary.  Financial planning is complex, as are the tax issues related to such planning; when divorce is also involved, different tax implications exist which may sometimes be helpful in furthering the new financial reality.  Here are some things to consider.

Spousal Support

Spousal support, often known as alimony, is money paid to the non-breadwinning spouse.  A spouse receiving spousal support pursuant to a written agreement or court order must pay taxes on this money; the spouse paying spousal support receives a tax deduction (which is not the case with child support).   Understanding these tax rules is particularly important in grey divorce because, due to the tax deduction of the support payment, the breadwinner can reduce taxes, thereby increasing year-end cash flow that could partially be used for retirement savings.

If agreed between the spouses, the divorce settlement can structure the spousal support as a non-taxable payment thereby allowing for more flexible tax planning if the spousal support deduction is not important for the breadwinner. Negotiating a non-taxable spousal support arrangement means paying a lower amount of support because the non-breadwinner will not need to use some of her/his support to pay taxes. This could free up money for retirement funding or living expenses on a monthly basis.

Real Estate

Although the following list of real estate issues is not inclusive, be aware of the impact on divorce:

  • Pay special attention to the capital gain exclusion rules associated with the family residence when it is sold.
  • Know the rules on how to keep a low property tax basis when selling a home and buying a new one after age 55.
  • Be aware, when keeping the investment real estate in the divorce, of the capital gains taxes that will be incurred if the real estate is sold.

Retirement Accounts

Some retirement accounts will distribute tax-free payments upon retirement; others will require the payment of taxes.  This needs to be understood not only from a future cash flow perspective, but also in terms of the valuation of assets in the divorce.  A retirement plan which is subject to taxes does not have the same value as cash in the bank.  The net after-tax value of assets should be considered in the property division.

The tax issues in grey divorce can be significant because many people at this stage in life have held assets for many years.  This creates tax consequences which will come to light years after the divorce.  Working with a knowledgeable family law attorney and CPA during a divorce to manage these tax issues is imperative.