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 Financial
Planning During Divorce
It is estimated that half of all marriages now end in
divorce. Understandably this is an emotional experience yet serious
consideration must be taken into account about the financial foundation
of families as a marriage comes to an end. Concerns over taxes are likely
a low priority for people experiencing divorce yet receiving solid tax
advice early on is essential in establishing financial choices.
Couples experiencing divorce should have a basic
understanding of current tax laws including Alimony
Tax Liability in making informed decisions about long term financial
arrangements. The Income
Tax Act clearly outlines payments of alimony are only deductible by
the alimony payer as long as a certain set of criteria are met:
a) The alimony payment amount must be agreed upon by both
parties
b) The payment must actually be for the purposes of alimony
c) The spouses must be living apart
d) Payments must occur on an ongoing basis
The final point discourages lump sum alimony payments as
they are not taxable to the recipient or deductible for the payer. An
audit of both parties can occur if a taxpayer tries to deduct lump sum
alimony payout. Negotiating the details of alimony payment timing could
greatly affect the long term outcome of each party's financial future.
For example if a couple agrees on an alimony payment of
$180,000 and it were to be paid out in a lump sum there are no deductions,
net tax savings or overall tax savings. Yet, if they agree to a 15 year
payment term of $1,000 a month the payer would have a yearly expense of
$12,000. Using a tax rate of 45% their deduction would be $12,000 and a
net tax saving of $5,400 respectively. Overall tax savings for 15 years
would be nearly $81,000.
Simple payment decisions on alimony payment timing can
greatly impact of future tax savings for people. Finding a good financial
tax preparer is just as advisable as hiring a good lawyer in times of
divorce.
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