The Rise of Domestic Break-Ups:
A Lawyer’s View of the Accountant’s Role
The American family is changing, and domestic break-
ups are on the rise. Statistics show that some 50% of new marriages end in divorce. Ever increasing
households
are maintained by an unmarried person who requires court support orders, or by “domestic partners”
who later break up. All of these situations involving tens of millions of Americans raise property
division, spousal maintenance, and child support issues. To paraphrase Ben Franklin: nothing is
certain in domestic break-ups, except pain – and taxes.
By law, court decrees addressing the above circumstances must equitably divide the parties’
property and enter maintenance and support orders that are just and in the minor children’s best
interests.
We attorneys more and more are realizing how vital it
is to know the tax implications of family splits to fulfill
the above legal mandates. However, we usually are not qualified to give tax advice. Many of us went
to law school because we were lousy in math. Our eyes glaze over when confronted with numbers.
The panacea to our problems is being able to reach out to the parties’ accountants to answer basic
tax questions. But we often find a reluctant accountant who wants nothing to do with the problem
for fear of alienating
the clients and creating a conflict of interest. When that happens, we turn elsewhere for tax
advice, and the parties may very well leave their accountants for others who seem to have all the
answers.
I will go out on a limb here and state that if you wish to remain relevant as a CPA who represents
individuals, you should know the answers to basic tax questions, like the following, related to
domestic break-ups, or at least be able to quickly get them. Your clients’ livelihoods and your
practice may depend on it.
• When should the marital community be terminated for the purpose of filing returns?
• Should divorcing parties file joint or separate returns and should either be concerned about the
other’s reporting history?
• What is a fair allocation of the dependency deduction for the minor children?
• Would one party benefit more from claiming the
dependency deduction than the other?
• What are the tax implications of dividing any
retirement accounts, and of cashing out any
such funds?
• What are the tax implications if the parties sell property awarded to them in a divorce or
partition action?
• Who gets to claim the home mortgage interest deduction and how much is it worth?
• What is each party’s income tax rate and what is their net income?
• What is the tax rate for the spousal maintenance payee, and how much is the deduction worth to
the payor?
• What other tax deductions can each party take
that would affect their income?
There are no one-size-fits-all answers to the above
There are no one-size-fits-all answers to the above
questions. Each case varies, and we lawyers want to
know the answers estimated in real dollars, so the parties can make fair and informed decisions.
Usually, the parties’ accountant is best placed to give the most accurate, cost-effective answers.
And the accountant can do it without becoming mired in
litigation.
Just as our societal norms are changing, so is the legal system in addressing and resolving the
above issues. People involved in the process are realizing that putting their
heads together in a non-adversarial environment is a better, less expensive way to achieve equity
in a volatile economy.
Your engagement letters might address the possibility of you providing a service in the event of a
family break-up. If not, we attorneys can help in obtaining the necessary
discussions. To limit your exposure, you may be
able to condition your participation on the parties’
agreement to use you only for settlement purposes, and not for litigation.
Staying relevant is the common goal of any professional. Given our ever-changing legal and societal
norms, your willingness to participate in the tax implications of a domestic break-up will put you
in the forefront and will help your clients reach a fair solution
to their problems.
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