In divorce, words matter. Sometimes, they matter a lot.
One situation in which they matter a lot is when you’re deciding how you’re going to take a lump-sum divorce payment.
(Note: What I mean by “lump sum” is you get all of the money now instead of spreading it out over time. For example, a lump-sum payment would be $50,000 by Friday. A payment over time would be $500 every month until you receive $50,000.)
Generally, there are two types of lump-sum payments made in Utah divorces:
(1) Lump-sum alimony, or
(2) Lump-sum property settlement.
Why does it matter which you take?
Taxes. It’s all about taxes.
As it stands right now, the person who pays alimony can write off the alimony on taxes. (This will change in 2019, thanks to the new federal tax overhaul bill.)
Correspondingly, the person receiving alimony has to report alimony as income on taxes.
This means if you take a lump-sum alimony payment, you will be taxed, and your ex will receive a tax break.
Contrast this with a property settlement.
Property settlements are nothing more than one person taking more property from the martial estate.
Since it’s not a transfer of wealth (alimony transfers income from one person to another), a lump-sum property settlement is a non-taxable event.
No one pays taxes, and no one gets a tax break.
Let me give a concrete example of what I’m talking about.
Scenario 1: Husband wants to pay Wife a $25,000 lump-sum alimony payment. If wife accepts this payment, Husband will write off the $25,000 payment on his taxes, which means he will pay less in taxes. Wife will have to claim $25,000 in income on her taxes, which means she will pay more in taxes.
Scenario 2: Husband pays Wife a $25,000 lump-sum property settlement payment in the divorce. The payment is a non-taxable event, so Husband cannot write off anything on taxes, and Wife does not have to claim the $25,000 as income.
In the end, if you’re the one receiving a lump-sum payment, you want to make sure it’s called a lump-sum property settlement, otherwise you’ll be paying taxes on the payment and giving your ex a tax break.
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