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Rules regarding tax issues must be covered in family law pact

California and federal law make it important for divorcing couples to make sure that their tax issues are settled prior to agreeing to a divorce settlement. An experienced family law attorney will be well versed in the tax issues that come up during the divorce negotiation process. In discussions with one's attorney, the options and preferences will be learned and decisions made accordingly.

One basic principle of federal tax law regarding separation and divorce issues is that child support is not income that is taxable to the recipient and it is not a deduction for the parent who pays it. On the other hand, alimony and some other types of payments are classified as taxable income to the recipient and qualify as a deduction to the paying former spouse. That fact makes it more desirable for the paying spouse to qualify as much of the payments as alimony and as little as possible toward child support.

Where income of the paying parent is high, the foregoing consideration will be a motivating factor in the negotiation process. Sometimes, the result of shifting income to the lower-earning spouse and concomitantly reducing the income of higher-earning spouse is something that both parties can find feasible and acceptable in a settlement. It results in the lower-earning spouse paying taxes at a reduced rate and perhaps escaping tax payments altogether, while the higher earning spouse can manage to pay less taxes and possibly enjoy the same or higher net earnings through the arrangement.

Of course, the foregoing hypothetical possibilities will depend on the actual circumstances of the parties. That is why the negotiating of such arrangements can be dangerous if not done under the guidance of an experienced family law attorney who is familiar with the federal and state tax consequences of the potential settlement agreement. California tax law generally follows the foregoing principles and will be consistent with an agreement based on the federal rules.

Source: forbes.com, "Taxes And Family Law: A Cheat Sheet Of What You Need To Know", Stephen Hicks, Sept. 8, 2017

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