The Creative Solution: Tax Strategies in Divorce Mediation

The Creative Solution Table of Contents

Summary:

Chip Rose’s chapter discusses the complexities of tax issues in divorce, arguing that collaborative approaches, focusing on maximizing mutual financial benefit, are superior to adversarial ones. He highlights the importance of joint decision-making to minimize tax liabilities and emphasizes the need for clients to gather comprehensive tax information to make informed choices regarding filing statuses, deductions, and exemptions. Rose advocates for a process where parties work together toward a common goal of reducing overall tax burdens, rather than engaging in zero-sum games. His expertise as a highly experienced mediator informs his perspective on this complex issue.

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Chapter 11: Tax Strategies in Divorce Mediation

When our esteemed editor Don reminded all of us that columns were due, he was thoughtful enough to remind any of us who may have forgotten that our deadline matched that of the Internal Revenue Service for our taxes. The image that came to mind was that of Marie Antoinette being asked to turn in her homework assignment before her unfortunate appointment with the guillotine later that afternoon. As soon as I was able to regain my state of denial about the tax thing, I began musing about the subject of taxes in divorce and considering how appropriate a topic it would be for the Spring column.

From both my professional and personal experience, I would venture to guess that taxes represent a kind of black hole for most people. Clearly, Congress did not design the tax code so that it could be easily understood or interpreted. Most of our employed clients either over withhold their taxes to avoid owing anything at the end of the year or under withhold throughout the year in order to be “rewarded” with a refund when April comes. I see very few clients who make the effort to calculate their projected tax liability, then reasonably estimate the actual withholding needed to cover that projected liability and keep what would have been the unnecessary portion of their withholding to be used as spendable income throughout the year. Even when clients have made the most minimal attempt to strategize their earnings and income tax planning, they are generally clueless as to what to do tax-wise when it comes to separation and divorce. The question of how to deal with their taxes becomes one more scary, foreboding doorway in the labyrinth of divorce. From a mediator’s perspective, this issue like all others has two elements to it—process and substance.

When it comes to tax issues (as is equally true for all other financial issues), clients must choose between a never ending series of forks in the road. The first process fork that confronts all clients is the choice between working toward an outcome that maximizes the financial benefit to each of the parties or something significantly less. If the clients commit to maximizing the financial benefit to each of them, then by definition they have committed to work collaboratively with one another. To pursue one’s self-interest without regard for the self-interest of the other reduces such a negotiation to a zero-sum game where winning three out of five marbles is perceived a victory. The participants remain ignorant of the fact that there could easily have been fifty marbles to divide had the parties chosen to work together. In the context of taxes, the question to ask the clients is: Would it be a goal of yours to give the state and federal governments as little money as legally possible and keep the savings in the family? Clients always say yes to this thereby creating a target to aim for and an obtainable goal around which a process can then be developed. A most important concept for clients to consider at the outset of the process is the counter-intuitive notion that the opposite side of the coin of self-interest is mutuality. The paradox is that one cannot maximize one’s self-interest in a relationship negotiation unless both parties do. This is a most important point of departure for discussing the possibilities for filing taxes in a postseparation world.

Critical to achieving maximization financially (by minimizing tax liabilities) is the gathering of all relevant information that will impact the choices the clients have to make. Among these are the following:

• The tax impact of filing jointly or separately in the year of separation;

• If separate returns are possible, who would qualify for head of household and who would not?

• What tax reduction would result from all the possible allocations of the dependent exemptions?

• What approach to the allocation of the home mortgage interest and property tax deductions optimizes the reduction of taxes?

• How does the existence of deductible spousal support, alimony, or family support change the impact of any of the other tax issues listed above?

• In addition to simply splitting equally any refund or liability, how might either be used in conjunction with the resolution of some other financial issue (regardless of whether it is a tax issue)?

These types of questions are just the tips of the iceberg of possibilities when taxes are viewed as another opportunity for clients to cooperate to their mutual benefit. The key is working together. If I had a dollar for every time a client came in and said something like: I talked to my CPA and she said that I should claim the children since they are with me most of the time. This is without regard to the fact that the client telling me this has no meaningful taxable income from which to benefit by claiming the exemptions. When clients choose to consult with financial professionals who are not trained in mediation or collaborative practices, the advice they typically get is one-sided, ignoring the bilateral nature of the issue as it impacts the former (or soon-to-be-former) spouse. This is the same dilemma that arises from clients who are represented by lawyers who lack the same training.

The meta-process key: Is it your goal to maximize your financial benefit in resolving this issue, with the understanding that such will only be achievable if each of you maximizes your outcome?; and the meta-substance key: What do we need to know in order to determine which approach will yield the greatest financial benefit? are critical points of departure for taking advantage of the opportunities that exist regarding individual and joint tax considerations. What is also true is the fact that regardless of the information imbalance that typically exists between the parties regarding the marital financial issues at the outset, neither party has sufficient information to make these decisions. The fact of this shared ignorance creates a common need that wonderfully compliments the common goal of maximization.

Thank goodness for the Masters Tournament or April–with prior year end income taxes, first quarter tax estimates (for the self-employed—read: most mediators), and real estate taxes all due–would not be spring-like at all. On the other hand, finding positive value in negotiating taxes for a divorcing couple…priceless.

The Creative Solution Table of Contents

Chip Rose

Chip Rose is highly experienced divorce mediator previously based in Santa Cruz, California and recently moved to Bend, Oregon. Chip founded The Mediation Center in Santa Cruz in 1980 and is certified as a Specialist in Family Law by the State Bar of California Board of Legal Specialization. In a client-centered… MORE