Spousal Maintenance and Undifferentiated Support in Washington

A.        Spousal Maintenance:  An award of spousal support or spousal maintenance (i.e. alimony) is taxable income to the individual who receives the support pursuant to I.R.C section 71(a).  Also, the person who is paying the support receives a tax deduction under I.R.C section 215.  To qualify as spousal maintenance all of the following requirements must be met, (1) the payment must be in cash or its equivalent; (2) the payment must be received by or on behalf of a spouse or former spouse under a court order; (3) the court order must not specifically state that the income is not included as gross income or not allowed as deduction; (4) the individual receiving the support must not reside in the same household as the person paying the support; (5) there is no requirement for the payments to continue after the death of the party who is receiving the support; and (6) the person paying the support and the individual receiving the support must not file a joint tax return for the year in which the support is paid.

It is important to advice a spouse who is receiving alimony to pay estimated tax payments on the alimony when it is received.  It is possible that a penalty may be assessed against the recipient of alimony, even if the recipient of alimony is due a refund at the time of filing of their income tax return.

B. Undifferentiated Support: Generally, a court order whether temporary or final must specifically distinguish the type of support being provided, i.e., alimony or maintenance versus child support.  An order that does not specify the type of support being provided or an “undifferentiated” or “unallocated” support order will be deemed by the IRS as alimony because it does not “fix” an amount for child support pursuant to IRC Section 71(c).

In Lawton v. Commissioner, T.C. Memo 1999-243, the tax court held that child support guidelines do not fix a portion of an unallocated temporary award of support as “child support.”  In Lawton, the court addressed a Pennsylvania court’s temporary order “for support of spouse and one child” (unallocated temporary support for the wife and child). The court declined to accept the wife’s argument that a portion of the payments were not alimony taxable to her because all awards for support must conform to the federally mandated child support guidelines. The Court determined that IRC Section 71(c)(1) requires that the amount of child support must be fixed by the terms of the divorce or separation instrument  not outside of the instrument.  The court determined that the wife should have had the divorce court characterize the payment as either maintenance or child support.

C. Recapture Rule: Both family law practitioners and clients should be aware of spousal maintenance awards that are disguised as property settlement awards.  The Internal Revenue Service has additional rules that prevent property settlement payments from qualifying for the tax benefits available to spousal support payments.  Generally, if alimony payments decrease or end during the first 3 calendar years, the recapture rule may apply. For example, if the divorce or legal separation document states that the Husband will pay the Wife a large sum of spousal support in the first year, and then substantially less support in second and third years, the IRS has a formula known as the “recapture rule” that may require the individual paying the support to recapture some of the money paid in year one as taxable income.  The recapture rules are set for in I.R.C section 71(f).




Tax Implications of Marital Assets and Division of Property

A. Property Settlement Award Not Taxable. A property settlement award or transfer of property between spouses incident to a divorce is not subject to taxation under I.R.C Section 1041.  It may be beneficial for the parties to reach an agreement that does not divide all of the assets, but instead awards one of the parties a lump sum settlement for their equity interest in the marital property.  For example, the parties may have a home worth $300,000.00 that is encumbered by a $100,000.00 mortgage.  Instead of selling the home, incurring realtor fees, and then dividing the remaining proceeds from the sale, an agreement could be reached that awards the home to one spouse.  In exchange, the individual awarded the home agrees to pay the other party $100,000.00 as a property settlement.  Under this scenario, no taxable gain or loss is recognized on the transfer of the $100,000.00 property settlement pursuant to I.R.C section 1041.

B. Gains from Sale of Personal Residence: I.R.C Section 121(b) provides that an individual may exclude from income up to $250,000.00 of gain ($500,000.00 if sold as husband and wife on a joint return) that is realized from the sale of a primary residence provided the Internal Revenue Service’s ownership and use tests are satisfied.  As a general rule the gain will only be exempt from tax if the home was used as primary residence for an aggregate of two years over the past five years.  So unless the home has increased $250,000.00 in value from the date you purchased it (or $500,000.00 if purchased with a spouse), there will be no taxable gain on the sale of personal residence.  It is important to note that if your client moved out of the residence before the divorce was final, but then ended up getting the house in the proceedings anyway, he/she can still claim the house as his/her primary residence.

In a situation where the home has increased in value, the issue will turn to whether or not the taxpayer primarily resided in the home for a total of two years during the five year period preceding the date of sale.  Any temporary periods of absence of less than an entire year would count as periods of use (e.g. vacation, work travel, or seasonal absences).  In the event of a temporary court order or restraining order that was entered while the divorce or legal separation was pending, I.R.C section 121(d)(3)(B) states 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.” A special exception to the two-out-of-five rules exists for active duty military personnel under I.R.C section 121(d)(9).

If any portion of the gain of a primary residence is associated with a separate dwelling unit, the dwelling unit is subject to allocation and taxation.  You will need to discuss the allocation issues with your accountant.  The dwelling unit will not be lumped in with the primary residence.  The IRS Regulations are clear on the allocation requirements for mixed use property.



Tax Implications of Divorce in Washington State

While there are many facets to the practice of family law, the divorce practitioner should be aware of tax implications associated with the treatment of property and debt division, spousal maintenance, child support, and attorney’s fees.  It is important to be versed enough in the area of tax law to properly advise clients the ramifications of a particular settlement, or to advise the judicial officer hearing your case of tax implications so that a settlement or ruling has the impact intended by the parties or judicial officer.  It is also critical when practicing family law to know your limitations when it comes to this area.   As a divorce lawyer, it is common to consult with someone whose area of expertise is in tax law whether that be a Certified Public Accountant and/or tax attorney.  IRS Publication 504 is a valuable publication offered by the IRS addressing many common issues associated with tax implications and divorce.



Common Tax Issues in Divorce

1. Married filing jointly: Married taxpayers may elect to file a joint return or file as married persons filing separately.   A husband and wife can file a joint tax return provided that a final decree of dissolution or decree of legal separation has not been filed on the last day of the tax year.  Special rules and exceptions may apply to resident and nonresident aliens and spouses of military personnel serving in combat zones.

2. Head of Household: Benefits to filing as head of household include a higher standard deduction, lower tax rate, and ability to claim certain credits (e.g. dependent care credit and the earned income credit). A taxpayer may be able to file as head of household if they meet all the following requirements:

  • Are unmarried or “considered unmarried” on the last day of the year;
  • Paid more than half the cost of keeping up a home for the year; and
  • A “qualifying person” lived in their home for more than half the year

3. Married filing separately may yield higher tax: Married couples who want to be responsible only for his or her own tax may each file separate returns.  There is no joint liability on a separate return.  But in almost all instances, if the taxpayer files a separate return, they will pay more combined federal tax than they would with a joint return. This is because the special rules apply if you file a separate return, such as a higher tax rate, lower deductions, and the disqualification of various credits (e.g. child and dependent care expenses).

B. Joint and individual liability:  Both spouses may be held responsible, jointly and individually, for the tax and any interest or penalty due on a joint return. This means that one spouse may be held liable for all the tax due even if all the income was earned by the other spouse.

C. Divorced taxpayers: Even after divorce a taxpayer may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return for a tax year ending before the divorce. This responsibility applies even if the divorce decree states that the other spouse will be responsible for any amounts due on previously filed joint returns.  A hold harmless provision in the decree, however, could be enforced through the divorce court.  (See also Innocent Spouse relief below).



Contempt of Parenting Plan in Washington RCW 26.09.160

The current law regarding contempt of parenting plan is codified in RCW 26.09.160.  Specifically, that statute states:

RCW 26.09.160

Failure to comply with decree or temporary injunction — Obligation to make support or maintenance payments or permit contact with children not suspended — Penalties.

(1) The performance of parental functions and the duty to provide child support are distinct responsibilities in the care of a child. If a party fails to comply with a provision of a decree or temporary order of injunction, the obligation of the other party to make payments for support or maintenance or to permit contact with children is not suspended. An attempt by a parent, in either the negotiation or the performance of a parenting plan, to condition one aspect of the parenting plan upon another, to condition payment of child support upon an aspect of the parenting plan, to refuse to pay ordered child support, to refuse to perform the duties provided in the parenting plan, or to hinder the performance by the other parent of duties provided in the parenting plan, shall be deemed bad faith and shall be punished by the court by holding the party in contempt of court and by awarding to the aggrieved party reasonable attorneys’ fees and costs incidental in bringing a motion for contempt of court.

     (2)(a) A motion may be filed to initiate a contempt action to coerce a parent to comply with an order establishing residential provisions for a child. If the court finds there is reasonable cause to believe the parent has not complied with the order, the court may issue an order to show cause why the relief requested should not be granted.

     (b) If, based on all the facts and circumstances, the court finds after hearing that the parent, in bad faith, has not complied with the order establishing residential provisions for the child, the court shall find the parent in contempt of court. Upon a finding of contempt, the court shall order:

     (i) The noncomplying parent to provide the moving party additional time with the child. The additional time shall be equal to the time missed with the child, due to the parent’s noncompliance;

     (ii) The parent to pay, to the moving party, all court costs and reasonable attorneys’ fees incurred as a result of the noncompliance, and any reasonable expenses incurred in locating or returning a child; and

     (iii) The parent to pay, to the moving party, a civil penalty, not less than the sum of one hundred dollars.

     The court may also order the parent to be imprisoned in the county jail, if the parent is presently able to comply with the provisions of the court-ordered parenting plan and is presently unwilling to comply. The parent may be imprisoned until he or she agrees to comply with the order, but in no event for more than one hundred eighty days.

     (3) On a second failure within three years to comply with a residential provision of a court-ordered parenting plan, a motion may be filed to initiate contempt of court proceedings according to the procedure set forth in subsection (2)(a) and (b) of this section. On a finding of contempt under this subsection, the court shall order:

     (a) The noncomplying parent to provide the other parent or party additional time with the child. The additional time shall be twice the amount of the time missed with the child, due to the parent’s noncompliance;

     (b) The noncomplying parent to pay, to the other parent or party, all court costs and reasonable attorneys’ fees incurred as a result of the noncompliance, and any reasonable expenses incurred in locating or returning a child; and

     (c) The noncomplying parent to pay, to the moving party, a civil penalty of not less than two hundred fifty dollars.

The court may also order the parent to be imprisoned in the county jail, if the parent is presently able to comply with the provisions of the court-ordered parenting plan and is presently unwilling to comply. The parent may be imprisoned until he or she agrees to comply with the order but in no event for more than one hundred eighty days.

     (4) For purposes of subsections (1), (2), and (3) of this section, the parent shall be deemed to have the present ability to comply with the order establishing residential provisions unless he or she establishes otherwise by a preponderance of the evidence. The parent shall establish a reasonable excuse for failure to comply with the residential provision of a court-ordered parenting plan by a preponderance of the evidence.

     (5) Any monetary award ordered under subsections (1), (2), and (3) of this section may be enforced, by the party to whom it is awarded, in the same manner as a civil judgment.

     (6) Subsections (1), (2), and (3) of this section authorize the exercise of the court’s power to impose remedial sanctions for contempt of court and is in addition to any other contempt power the court may possess.

     (7) Upon motion for contempt of court under subsections (1) through (3) of this section, if the court finds the motion was brought without reasonable basis, the court shall order the moving party to pay to the nonmoving party, all costs, reasonable attorneys’ fees, and a civil penalty of not less than one hundred dollars.

 [1991 c 367 § 4; 1989 c 318 § 1; 1987 c 460 § 12; 1973 1st ex.s. c 157 § 16.]

Contact a Seattle Divorce Lawyer to discuss the specific application of RCW 26.09.160 as it applies to your parenting plan case.


Upcoming NBI Seminar on Tax Consequences of Divorce

Philip C. Tsai and Todd R. DeVallance will be speaking at the upcoming NBI seminar on the tax consequences of divorce.  When it comes to the financial impacts of divorce, tax consequences are critical to clients.  This seminar will discuss common tax issues, the tax impacts of dividing assets, income tax considerations, property tax issues, and tax planning strategies.  Register to join us today!


Property Agreements for Divorce in Washington

A Community Property Agreement is a specifically statutorily created agreement that spouses may enter into after marriage which converts separate property of either spouse into community property.  It is different than a Prenuptial Agreement in that it is entered into after marriage, whereas a Prenuptial Agreement is entered into in anticipation of marriage.  There are specific procedural requirements regarding the validity of a Community Property Agreement that need to be followed to be enforceable in Washington state.

Many people use Community Property Agreements as Estate Planning devices to avoid probate.  A community property agreement may also affect how a court characterizes property in a divorce, and therefore may have specific ramifications in determining division of property as the characterization of property usually impacts the division thereto.


Marriage Annulment in Washington State

Washington does not use the term “Annulment” when referring to an invalid marriage.  Under Washington Law, a spouse may make a request that the Court determine that a marriage is invalid pursuant to the filing of a Petition to Determine the Validity of Marriage. 

An example of a situation where the Court will declare a marriage to be invalid is when a spouse was previously married and never divorced but then remarried. There are other statutory factors that the Court will consider when making the determination of the validity of marriage.  Please contact a Family Law Attorney at TLC to discuss the validity of your marriage.


4 Things Divorcing Women Need To Know About Retirement

pMany people think divorce only happens among the young, but that’s just not the case. In fact, a recent study showed that between 1990 and 2009, the divorce rate among older adults actually doubled, and that in 2009, about one in every four divorces occurred to people over the age of 50./p

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