We are nearing tax time and this is a good time to talk about tax optimization. Often the most obvious settlement option for your client isn’t actually the best one. Sometimes a different settlement that seems the same on the surface actually puts the client in a better tax position. You can use Divorce Financials divorce software for attorneys to analyze the tax implications of any settlement offers.
Alimony Vs. Child Support
On the surface alimony and child support seem the same: payments from one person to an ex-spouse. However in the eyes of the IRS they are different. Alimony is income. As such it is deductible to the payor and the recipient must claim it. Child support on the other hand is not considered income. It is considered a normal expense when raising a child rather than income for the child or parent. After all, if you buy your child a pair of shoes that’s not considered taxable, so neither are child support payments.
Many states have formulas for child support or alimony but that doesn’t meant the parties have to use those values. Creative family law attorneys can use the analysis tools in Divorce Financials divorce legal software to analyze the tax benefits and propose a settlement that is better for both parties.
Divorce Financials includes an Alimony Analysis tool that allows attorneys to examine the tax impact of different alimony settlements. This allows attorneys to trade off alimony and child support to find an optimal tax position. For example one payor might prefer to pay more alimony, which is deductible, than child support, while another who doesn’t itemize deductions might prefer paying more child support.
The IRS doesn’t really care since they get their taxes either way. However it’s important to have settlement statement software analysis to back up the offer. This allows the spouse and the spouse’s attorney to see the logic behind the numbers and, if the agreement should end up in court, does the same for a judge.
Not all divorces will benefit from tax optimization, but for those that do it can make a big difference. Taking full advantage of Easysoft’s line of attorney practice management software allows attorneys to give their clients more choices and provide better service.