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Mediation, Taxes, and Spousal Maintenance

Wednesday, 26 October 2011

blog-logoOne contentious element of any divorce settlement is determining its financial impact on each spouse.  When one spouse expects a dramatic change in his or her standard of living after the divorce, spousal maintenance is often ordered.  Some people work hard to avoid the tax consequences of court-ordered spousal maintenance, since it is taxed as income to the recipient.

Mediation is one way to consider a more financially savvy approach to divorce and minimize the impact of spousal maintenance, or alimony, on the recipient.  Of course, the paying party would have to agree, since he or she would need to give up a valuable tax deduction.  Contrary to what many divorcing couples believe, couples are able to “opt out” of this inefficient and “taxing” impact of alimony, but this approach may not work for everyone.  When couples enter mediation, it may be helpful to bring in a financial planner or tax accountant who can evaluate the net benefits of both approaches.

Before going any further down this road, be careful to avoid any confusion about the definition of spousal maintenance.  It is often referred to as “alimony” when filing federal taxes and as “spousal maintenance” by the legal community.  However, it all falls under the umbrella of “spousal support” and depending on your situation it may be granted on a temporary, rehabilitative or permanent basis.   It is also widely considered one of the most challenging aspects of divorce.  That said, as long as the parties are somewhat amicable, mediation may be the best way to design a workable arrangement for spousal maintenance that focuses on maintaining each party’s cash flow after the divorce is final.

In contrast to litigation, mediation offers couples a rare opportunity to explore what their post-divorce financial life will look like. Once they understand this, the parties are freed from their “fear of the unknown,” and are able to have a more informed discussion about what is a fair amount of cash flow for each, keeping in mind their obligations and household circumstances.  Rather than looking at spousal maintenance as a court-ordered formula, the mediated approach allows for a more personalized approach to the data.  Ultimately, through mediation a couple can conceivably make a “real world” post-divorce financial plan meets his or her needs after the divorce, including spousal maintenance, taxes and child support.

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MPatMarrisonFor over a quarter century, we have helped people during what is often the darkest time in their lives. Divorce is not easy even under the best of circumstances. For most people, family is central. Having something go wrong in the family can have a ripple effect that extends beyond the home and into other areas.

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