Question: The more I have gotten into the divorce process, the more problems I have learned about -- especially in the area of income taxes. What are the most common tax pitfalls associated with divorce?Answer: Divorce can generate all kinds of tax consequences -- income, estate, and gift -- many of which are "hidden" and ignored until it's too late, especially if the major assets in the marriage are stock accounts, IRA’s, and pensions – all of which are tax booby-trapped.
For example, if there is a stock account worth $150,000 with a $50,000 tax basis titled in the name of one spouse, this can mean a hidden tax liability to the unwary spouse who gets this asset and later sells it. Solution: If the asset is going to be sold and the proceeds are going to be equally divided, it might be a good idea, if titled only in one spouse's name, to transfer a one half interest to the other before the sale of the asset so both spouses will share the capital gains taxes equally. Or split the account in kind so that each spouse will receive one-half of the assets in the account. And if there's a chance that past returns omitted income or overstated deductions, indemnification in a settlement agreement is a necessity -- although not binding on the taxing authorities. And to avoid getting stuck with taxes on income you know nothing about, you may not want to file a joint tax return after the date of separation.
Q: What are the benefits and detriments of taking the 5th Amendment in divorce court? I have been charged with adultery which my lawyer tells me is a crime. I sure would hate to go to jail for this.
A: Although adultery is a crime in some states, it is probably not very high in the pecking order what with all of the other pressing matters that face law enforcement today. In fact, we know of very few prosecutions and of no jail sentences for adultery in modern times. Generally speaking, to be criminal, adultery must be habitual. The use of the right against self-incrimination in divorce cases can be abused and is generally frowned upon by the Family Courts for obvious reasons. Conceivably, a litigant could "take the Fifth" to every question asked during discovery and then go to trial and say anything he or she wanted to say. Obviously, this is not fair. In the majority of states, using the Fifth Amendment can lead to your requests for affirmative relief being stricken by the Family Court.
Your best bet is to discuss with your options with your lawyer. These options include 1) Ask the local solicitor for immunity from prosecution, 2) Ask the family court judge for immunity from prosecution, 3) Try to get a civil release from your wife -- which may be difficult to do. Only after you have reviewed all of your options should you make the decision that is best for you.
Q: Until my husband and I were divorced this past November, he was paying me a minimum amount of money each week ($200) plus all of my bills according to a temporary court order. My lawyer has advised me not to file joint tax returns for 1998 because all I received from my husband was $10,000. I just talked to my ex-husband and he plans to deduct everything he paid to me and on my behalf -- car payments, car insurance, house payments, health insurance, my credit card obligations, car repairs, telephone bills, etc., totaling over $35,000. Can he do this? If he does, I don't have the money to pay the taxes. Should I agree to file a joint return?
A: So long as the court order provided for these payments, your husband may well be able to deduct everything he paid to you and on your behalf. If he can, he may be better off filing separately and taking these major deductions. Before your lawyer told you not to sign joint returns, he should have made calculations that included payments made not only to you, but also on your behalf as these can all be classified as taxable alimony. We suggest that you revisit this issue with your lawyer and a CPA in an effort to try to remove yourself from the stew in which you may find yourself.
Jan Collins is an award-winning writer and editor. Jan Warner is a matrimonial, tax, and elder law attorney. Both are based in Columbia, South Carolina.
Please send you questions by email to janwarner@flyingsolo.com or by mail to P.O.Box 11704, Columbia, S.C. 29211.
