1976, January, Pg. 40. Tax Tips.

5 Colo.Law. 40

Colorado Lawyer

1976.

1976, January, Pg. 40.

Tax Tips

40Tax Tips

Tax Considerations in Marital Settlements

The typical marital settlement is likely to involve a number of provisions, each of which represents a major tax trap or tax savings opportunity for one spouse or the other. Many frequently found provisions have tax consequences which favor one party at the expense of the other. For example, the husband receives a tax benefit from the alimony he pays only if the wife sustains a tax disadvantage. This pattern of tax benefit to one spouse at the other's expense is found in the most common aspects of marital settlement arrangements---the transfer of property for release of support rights, child support, agreements covering dependency exemptions, and legal fees.

However, the parties through their legal representatives have virtually complete control of the tax consequences of the settlement arrangements. As a result, they can draw an arrangement that puts the tax burden where they agree it should fall, and make adjustments in support or other provisions to compensate for a tax advantage obtained or surrendered.

It is especially important in marital settlements that the provisions reflecting the parties' tax arrangements be drafted with maximum clarity. It is the Treasury Department's frequent practice, where it finds a provision to be ambiguous, to deny tax benefits to both parties and thereby require that the ambiguity be resolved by the parties in a court contest.

The burdens and benefits to be considered in drafting the various provisions are discussed below.

Alimony

The husband's payments for the wife's support, generally termed alimony, can be made taxable to her and deductible by the husband, or tax-free to her and nondeductible by him. To be taxable to the wife and deductible by the husband, the payments must be "periodic," must be made under a decree or written agreement, and must be made because of the family or marital relationship and in recognition of the general obligation of support. Failure to meet these requirements, deliberately or accidentally, will render the payments tax-free to the wife and nondeductible to the husband. I.R.C. §§ 71 and 215; 34 Am. Jur. 3d, Federal Taxation, ¶ 7300.

Property Transfer and Settlements

A husband's transfer of property to his wife in...