One of the most common tax consequence of a divorce involve payment of support from one spouse to another, because these payments are generally deductible by the payor and are included as taxable income to the payee. This general rule will apply as long as the divorce judgment does not expressly provide that such payments are nontaxable and nondeductible. This also applies to temporary alimony during the pendency of the divorce proceeding.
Taxes also affect the transfer of property between the spouses and paying attorney fees.
Transferring Property Between Spouses in a Michigan Divorce
Generally speaking, property transfers as part of a property settlement between two spouses are tax free. These transfers must be related to the cessation of the marriage if it is made pursuant to a divorce or separation and it occurs within six years of the date of the divorce. This means that no loss or gain in value will be recognized on transfers of property, because the person receiving the property treats it as a gift.
This same rule does not apply if the property is sold to a third-party. It is quite common in a Michigan divorce for the martial home to be sold, and the proceeds to be divided as part of the settlement. It's important to note that the tax liability will be divided based upon how the ownership in the home is held. For example, if a husband and wife each own 50 percent of the home, that is what percent of the tax bill each party will pay. This applies even if one party is to receive a different amount of the proceeds as part of the same. It's possible to owe 50 percent of the tax bill, but only receive 20 percent of the sale proceeds.
When dividing property in a Michigan divorce, it is important to identify all of the tax liability for each spouse. If a spouse is taking on certain debts, especially debts tied to property, it is important that the real value be reflected in negotiations A property worth $500,000, but carrying a debt of $250,000 is worth a lot less than the sticker price of $500,000. Most courts will only factor in this reduced value if it is likely that a sale will take place, rather than a speculative sale sometime in the future.