Saving Income Taxes

How to make additional funds available to both parties in a divorce

by Melvyn B. Frumkes*

Excerpted from Divorce Taxation

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   An example of how a tax savings may be effected by delineating all child support as alimony is as follows: The Wife needs at least $6,000 per annum support for the children. She earns $15,000 per year and, therefore, is not entitled to alimony. The Husband earns $40,000 per year. He has not remarried. In 1998, he will file as a single person, she as head of household. By making all the support payments alimony and adding to that which will be paid to the Wife a sum representing additional funds available because of the tax savings, both parties benefit.¹⁴²

UNALLOCATED ALIMONY AND CHILD SUPPORT

                        Husband’s Earnings                                               $ 40,000/yr.

                        Wife’s Earnings                                                     $ 15,000/yr.

                        Alimony                                                               None

                        Need for Child Support—at least                            $  6,000/yr.

                        Filing Status:

                                    Husband                                                  Single

                                    Wife                                                        Head of Household

COMPUTATION 1:

Entire payment of $6,000 as child support

                                                                          HUSBAND            WIFE

Taxable income before payment                            $ 40,000               $ 15,000

Income tax                                                             ( 4,162)                  (  495)

Child support payment                                             ( 6,000)                    6,000

Available funds                                                     $ 29,838               $ 20,505

COMPUTATION 2:

Entire payment of $6,000 as alimony

                                                                           HUSBAND         WIFE

Taxable income before payment                            $ 40,000            $ 15,000

Alimony payment                                                  ( 6,000)             6,000

Taxable income                                                       34,000             21,000

Income tax                                                          ( 3,172)           ( 1,142)

Available funds                                                    $ 30,828          $  19,858

COMPUTATION 3:

First Step:

Determination of savings if all  alimony

                                                                       HUSBAND                WIFE

All alimony—funds to Husband  after tax               $ 30,828

All child support—funds to  Husband after tax       (29,838)

Additional funds to Husband                                $    990

Second Step:

Additional funds available to  be paid to Wife

                                                                         HUSBAND                WIFE

 

Taxable income                                                     $ 40,000               $ 15,000

Alimony                                                                    $6,000

Plus: Additional funds  available                                       990

                                                                                $6,990              ( 6,990)                    6,990

Taxable income                                                         $ 33,010           $ 21,990

Income tax                                                               ( 3,024)            ( 1,291)

Available funds after tax                                             $ 29,986           $ 20,699

COMPUTATION 4:

Benefit to parties—paying to Wife additional alimony representing tax savings to Husband:

                                                                          HUSBAND          WIFE

All alimony to Wife plus additional funds available

 (Computation 3, second step)                                $ 29,986          $ 20,699

 

All child support                                                      (29,838)          (20,505)

Each party winds up with more                               $   148             $    194

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Melvyn B. Frumkes specializes in complex asset and custody cases. He is a past President of the Florida Chapter of the American Academy of Matrimonial Lawyers and is Associate Editor of the Journal of the American Academy of Matrimonial Lawyers. He is past Chairman of the Family Law Section of The Florida Bar. Mr. Frumkes was on the faculty of the National Judicial College in Reno, Nevada for 18 years where he taught Divorce Taxation. He is on the Board of Editors of the Journal of the American Academy of Matrimonial Lawyers, and the Family Advocate (ABA, Family Law Section) and was a Contributing Editor to Fair$hare. He is Board Certified in Marital and Family Law by The Florida Bar.  He has been listed in the Best Lawyers in America since its inception in 1983.  He is the author of Divorce Taxation, from which this article is excerpted.

 

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