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Monday, November 07, 2005

Lesser Known Mediated Divorce Settlement Options: Nontaxable Maintenance

Mediation with a professional, experienced divorce/family mediator can provide divorcing couples expertise to evaluate financially savvy approaches to divorce. From time to time we will blog some lesser known (but nonetheless valuable) settlement options that may allow your Colorado family to minimize the financial impact of your divorce.

The ordinary taxable approach to “spousal support,” “maintenance” or “alimony” — they’re all the same, by the way! — generally affords a cooperative divorce couple significant tax savings. (In this ordinary approach, spousal maintenance is reportable as income to the recipient and deductible by the payor.) But many couples (and even many divorce or family lawyers) assume such savings are always present or that this approach is required by federal divorce tax laws.

But this is not the case. Analysis of a tax advisor (or even review with standardized software such as FinPlan's Divorce Planner) may reveal this approach costs the couple net cash flow. For example, if both parties find themselves in similar tax brackets before a spousal support plan is considered, the ordinary approach is likely inefficient from a tax perspective. In such circumstances, the divorcing parties may choose, as part of their divorce financial planning and by agreement, to "opt out" of the tax treatment of alimony. (This is expressly allowed by Sections 71 and 215 of the Internal Revenue Code).

A thoughtful review of the net benefits to both 1) the ordinary taxable and 2) the less often utilized “opt-out” and nontaxable approaches to spousal maintenance, should be carefully considered in designing any Colorado divorce financial plan. Using divorce tax planning software, both Larry and I routinely consider with our couples in mediation, the net benefits of both these approaches to spousal maintenance.

(See also our maintenance / alimony law related articles on Mediation’s Power in Spousal Maintenance (Alimony) at Divorce and on Colorado Temporary Maintenance.)

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