10. Post Tax Outcome
12. Closing Thoughts
13. About the Author
Focusing on the Post-Tax Outcome
At the risk of offending your intelligence, let me begin by stating what may seem to you the obvious: That absent extraneous and compelling non-economic forces, you and your wife will each seek, among other things, as much money (in some form) as you can get.
This axiom warrants mention because commonly one party or the other in a divorce, normally the one who most desires it, invests his every expectation in a desired outcome early in the process that almost invariably later proves unrealistic. Such hopes often rest on nothing more than his uniformed wife’s acquiescence to his subtle but relentless nagging.
Ultimately she ends up with a result that at least resembles what the law would have given her. In the meantime however, a lot of precious time and money can be wasted.
Therefore any exploration of avenues for settlement should begin at least by considering the areas commonly permitting win-win resolutions.
Most prominent among these is the parties’ and the court’s focus on the post-tax outcome for the parties. After all, this is what counts, not the nominal dollars each receives. A good divorce lawyer will keep his and his client’s eye on this ball, not the facial pre-tax numbers.
For there to be prospects for a tax-driven deal, there must be either substantial disparity between the parties’ present or anticipated incomes, or there must be a proposed asset allocation which triggers substantial but soluble tax concerns.
Regarding the former, if your income is six digits per year and your wife’s is lower than 5 digits, it is quite conceivable that the spread between your top margin rates (state and federal) and your wife’s may be close to 20%, given that the top marginal rate is 39.6 percent. As previously discussed, maintenance is deductible to you and includable by your wife.
Therefore, in the above scenario it could cost you approximately 50 cents for every 1 dollar you pay your wife in maintenance. Furthermore, in the above scenario, she will likely retain approximately 85 cents after taxes. She may in fact keep 100% if her income is sufficiently low and she has all the tax benefits accompanying dependent children.
By contrast, you will recall, child support is not deductible and similarly I have explained that a simple division of assets in a divorce does not create a taxable event.
Naturally then, notwithstanding the visceral distaste of maintenance to most men, it can be highly advantageous to structure, where possible, child support and property settlements as maintenance. In such cases both parties can walk away ahead. This strategy has its limitations, however, as the IRS imposes limitations on such characterizations.
Also, to sell your wife on the deal, such agreements must be worded so as to assure the stream of payments irrespective of changes in either parties’ circumstances (keeping in mind of course any applicable IRS red flags). The wife’s confidence level is bolstered by the laws governing bankruptcy which preclude a debtor from discharging debt “of the nature of support,” which specifically targets child support and maintenance in bankruptcy.