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If you are in the midst of a separation or divorce, consulting a tax specialist as soon as possible may be a very valuable investment. This is especially true in situations that involve young children, a business operated by one or both spouses, a corporation, or significant assets.
A tax specialist may consult with both spouses and their lawyers to structure the division of assets and ongoing support payments in the most tax effective manner. In addition, a tax specialist may review the draft separation agreements to help both sides understand the tax implications of the agreements and avoid any costly and unexpected tax results.
Imagine a scenario where Pete and Amy are considering divorce. They have three young children, ages 6, 8 and 10. Pete is a dentist with a professional corporation valued at $1,500,000 that earns $250,000 per year. Amy works part-time as a school teacher earning $35,000 per year. Here are some of the issues that your tax specialist may consider:
How could support payments be structured to split taxable income and make the best use of marginal tax brackets? Possible tax savings $4,000 - $6,000 per year.
How could the custody and support agreements be drafted so that each spouse is able to claim the wholly dependent person “equivalent to spouse” tax credit for one child? The value of the additional credit is $2,000 - $3,000 per year.
How could the value in the professional corporation be divided without triggering any immediate tax? There are a couple ways this could be done, estimated tax savings $50,000 - $100,000.
How could the Lifetime Capital Gains Exemption be utilized to shelter tax on a division of value within the professional corporation? Estimated tax savings $150,000 - $200,000.
If the couple is willing to work together, what other creative alternatives could be considered?
How could the couple fund university education for the children in the most tax effective manner? Assuming university costs of $50,000 per child, possible tax savings $15,000 – $20,000.
Could a trust be established to allocate investment income to the children as a way of providing support? Possible tax savings 10,000 – 15,000 per year.
When couples are willing to work collaboratively in the settlement process, it is easier for the parties to consider alternatives for providing support and dividing assets that may have beneficial tax consequences. In the above example, the total tax savings for Pete and Amy could reasonably be $100,000 - $300,000. These tax savings may exceed the total professional fees for the entire divorce and separation process!
Related Topics:Personal Tax
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