Prior to filing for divorce, various federal tax considerations should be reviewed due to their potentially profound implications. Among the major issues commonly covered in a divorce decree or agreement are: alimony, sometimes referred to as “spousal” or “separate maintenance” support; division of property; and child support. Each has its own tax treatment and implications.

Division of Property

Most divorces involve a division of the property owned by the couple. Such a division of property is not usually a taxable event, i.e., neither owes taxes nor gets a deduction from income because he or she receives certain property as a result of the divorce.

There are, however, tax implications following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received such property (pursuant to a divorce) to pay taxes in connection to that property.

Personal and real property have a “basis” for federal tax purposes. The basis is usually the purchase price of the property. When the property is sold later, the amount by which the sales price exceeds the basis is called “capital gain.” Capital gain is usually taxable at special rates. Thus, when property distributed pursuant to a divorce decree is subsequently sold by the receiving spouse, the receiving spouse may be required to pay taxes on the proceeds of the sale.

For example, in a divorce, the wife may receive the family home while the husband might receive stock or other investments equal in value to the house. If the house has a lower basis than the stock, when both are sold, the husband could end up with significantly more money, because he owes less capital gains tax.

On the other hand, under tax law applicable at the beginning of 2004, the first $250,000 (for individuals) or $500,000 (for couples) of the taxable gain on the sale of a qualifying personal residence is exempt from tax. In light of these tax issues, selling the house before the divorce, then dividing the proceeds, might make more sense.

Child Support

The parent who is granted custody of the child or children from the marriage, usually receives a set amount of money per month as “child support.” Child support payments are not includable in the taxable income of the receiving spouse and are not tax deductible by the spouse making the payments.

If the written agreement or divorce decree orders both child support and alimony and the spouse making the payments pays less than the required total amount, for tax purposes, the child support obligation is deemed paid in full first. Only money exceeding the amount of the child support obligation is treated as alimony.

Alimony or “Spousal Support”

In general, for federal income tax purposes, alimony and “separate maintenance payments” are “deductible” from the income of the spouse paying and includable in income for the recipient. Keep in mind that ALL THIS changes on January 1, 2019 according to the new tax laws signed into law this past December when Alimony i.e. Maintenance will no longer be deductible by the payor nor includable in the income of the recipient for Federal Tax Purposes. A word to the wise is simply if you are contemplating and/or are presently in the process of Divorce and you are going to be paying Alimony/Maintenance then if at all possible try to complete your matters prior to 1/1/2019. In that way you will be able to claim the deduction in all future years and you will not lose this benifit to you. “Deductible” for federal income tax purposes means it is subtracted from a taxpayer’s gross income before taxes are calculated, resulting in lower taxes. Taxpayers with a threshold amount of deductions must file a particular form with the IRS when paying income taxes and list such deductions.

Between the time a couple separates and a divorce decree is granted, one spouse may pay money for the support of the other spouse. These payments are deductible as long as they are made pursuant to a decree, court order or a “written separation agreement.” In order for alimony payments to be deductible, federal tax laws and regulations require the following:

  • The payments are made in cash, check or money order (no promissory notes, transfers or use of property, transfer of services, etc.) to the spouse, or to a third party in lieu of alimony at the written request of the recipient spouse, stating the payments are intended as alimony, and the request is received before the tax return is filed
  • The divorce decree, order or the written agreement of the parties does not identify the payments as something other than alimony
  • The spouses do not file a joint return with each other
  • The spouses are not members of the same household when the payments are made, if they are legally separated under a decree of divorce or separate maintenance – separation within the family home is not sufficient
  • There is no liability to make the alimony payments after the death of the recipient spouse – if part of the payment amount continues after death, that portion is not deemed alimony, and if all of the payment continues, none of it is alimony
  • The alimony payments are not treated as child support

 Although “loss of consortium” damages are traditionally associated with spousal relationships, modern cases have extended the right to recover them to parent-child relationships. Referred to as “filial consortium damages,” these awards are intended to compensate the parent for the loss of affection, love and companionship that results from a child’s injury or death.

Wrongful Death Actions Distinguished

In cases where parents sue for the wrongful death of their child, most jurisdictions permit parents to recover filial consortium damages from the wrongdoer. Parents can generally recover these damages under the state’s wrongful death statute.

The situation is much different, however, in cases where the child survives. Under these circumstances, although the child may have suffered severe permanent injuries, state law varies significantly with respect to the availability of filial consortium damages. As a general proposition, most states do not recognize parents’ claims for lost consortium when the child survives.

Majority of States: No Filial Consortium Damages for Non-Fatal Injuries

A majority of jurisdictions do not permit parents of non-fatally injured children to recover filial consortium damages. The following examples reflect the status of the law in several states:

  • In 2003, the Texas Supreme Court declined to extend a claim for loss of consortium to the parents of a child with a non-fatal injury. As such, Texas does not permit parents to recover loss of consortium damages resulting from a child’s serious injuries.
  • In 1988, Michigan’s highest state court held that a parent has no cause of action for loss of consortium damages when a child is negligently injured. However, the parent is still entitled to sue for loss of services as well as medical expenses.
  • In 1986, the Wyoming Supreme Court similarly rejected a parent’s right to consortium damages resulting from serious injuries to a child.

Some States Allow Parents to Recover for Non-Fatal Injuries

A substantial minority of jurisdictions authorize parental recovery of consortium damages for injured minor children. In some states, parents may recover under a statute which expressly sanctions such damages. In other states, however, parents must rely on case law and judicial interpretation to recover filial consortium damages.

Though not an exhaustive list, the following states permit a parent to recover loss of filial consortium for non-fatal injuries:

  • A Massachusetts statute sets forth the following rule: “The parents of a minor child or an adult child who is dependent on his parents for support shall have a cause of action for loss of consortium of the child who has been seriously injured against any person who is legally responsible for causing such an injury.”
  • In 1994, the Florida Supreme Court expressly ruled that a parent has a common law right to recover for loss of an injured child’s consortium, stating “The loss of a child’s companionship and society is one of the primary losses that the parent of a severely injured child must endure.”
  • In 1986, the Arizona Supreme Court granted parents the right to recover consortium damages from a third party who permanently injures their adult child. The court expressly refused to limit loss of consortium damages in severe injury cases to cases involving minors: “Loss of consortium is a compensable harm, and we see no basis for limiting this action solely to cases of wrongful death [and] no reason for limiting the class of plaintiffs to parents of minor children when the parents of adult children may suffer equal or greater harm.

 Minors have no legal capacity to manage property. Thus, transferring property and other assets to minors can be problematic. For example, parents or other adults may wish to convey a small amount of property to a minor without investing the time and expense of establishing a trust.

Another option is to set up a custodianship for the minor. Under a custodianship, the transferring party names a custodian and transfers the property into an account in the minor’s name. The custodian holds and manages the custodial property for the benefit of the minor. A custodial account is irrevocable and belongs to the minor as the owner.

Uniform Transfers to Minors Act (UTMA)

The Uniform Transfers to Minors Act of 1986 (UTMA) was passed in order to eliminate some limitations of the earlier Uniform Gifts to Minors Act (UGMA). All states have adopted some form of the UTMA or UGMA. The UTMA provides a convenient method of allowing the transfer of property to minors without setting up a trust.

In a custodianship, an adult custodian holds and manages property for the benefit of a minor child until that minor is old enough to receive the property. A UTMA transfer is irrevocable, and the custodian must relinquish the property to the minor as soon as they reach the age of majority, which varies by state (usually 18 or 21, sometimes 25)


Continue Reading Keeping Assets in a Custodial Account for a Minor

Child support payments may either be ordered by the court in a divorce decree or legal separation agreement or mutually agreed upon by the parties. Several laws exist which are designed to make child support orders readily enforceable across the United States. However, despite such efforts, “dead-beat dads,” or parents who consistently fail to make support payments in full or at all, continue their delinquencies. As a result, there are further measures available for the collection of child support payments. Continue Reading Consequences of Falling Behind on Child Support Payments

Frequently, as a result of a change in circumstances, parents seek to modify child support orders. Although the law varies considerably among states, delaying or failing to modify child support to reflect current circumstances can have a serious impact on both parents (whether recipient or payor) and children. Continue Reading Procedural Considerations for Parents Seeking to Modify Child Support

Although the law with respect to child support modification varies considerably by state, generally, before a court will modify a child support order, the requesting parent is often required to show that changed circumstances legitimately warrant the modification. Without this requirement, frequent, repeated and arbitrary requests for modification would burden the already overcrowded court system, as well as the non-custodial parent.

The Uniform Marriage and Divorce Act

While some states have implemented child support modification standards derived from judicial decisions, other states have implemented statutory provisions that closely resemble the language set forth by the Uniform Marriage and Divorce Act (UMDA). According to the text of the UMDA, a child support order may be modified, with few exceptions, “only upon a showing of changed circumstances so substantial and continuing as to make the terms unconscionable.” Consider the following examples of state legislation:

Arizona: “Substantial and continuing change of circumstances”
Idaho: “Substantial and material change of circumstances”
Pennsylvania: “Material and substantial change in circumstances”
Typically, the parent requesting the modification has the burden of proving the change in circumstances.

Frequently, as a result of a change in circumstances, parents seek to modify child support orders. Although the law varies considerably among states, delaying or failing to modify child support to reflect current circumstances can have a serious impact on both parents (whether recipient or payor) and children. Continue Reading Practical Considerations Regarding Child Support Modification