Thinking Through THE TAX RAMIFICATIONS OF A PRENUP

• Published in: Family Advocate 2011-01, Vol.33 (3), p.43-45
• Main Authors: COHEN, NEIL S., SCHLISSEL, STEPHEN W.
• Format: Magazinearticle
• Language: English
• Subjects: Agreements; Alimony; Cooperation; Cost control; Defined benefit plans; Disclosure; Divorce; Federal court decisions; Income taxes; Interpretation and construction; Marital separation; Marriage; Personal exemptions; Prenuptial agreements; Provisions; Retirement plans; Spouses; Support (Domestic relations); Tax benefits; Tax deductions; Tax legislation; Tax payments; Taxation; Waivers
• ISSN: 0163-710X; 2327-8331

Taxability of spousal support Among other things, I.R.C. § 71 provides that: "Gross income includes amounts received as alimony or separate maintenance payments." Thus, support payments from one spouse to the other, made pursuant to a judgment of divorce, an order of the court, or an agreement, as defined in I.R.C. § 71(b)(2), are tax deductible to the paying spouse and taxable as ordinary income to the receiving spouse. Note, however, that child support is neither tax deductible to the paying spouse, nor taxable to the receiving spouse. Although some state courts have held that a waiver of rights contained in a prenuptial agreement is effective (see, e.g., Strong v. Dubin, Tb AD.3d 66, 901 N.Y.S.2d 214 (1st Dept., 2010); Ln re Hopkins, 214 111. App. 3d 427, 574 N.E.2d 230, appeal denied, 141 111. 2d 542, 580 N.E.2d 115 (1991). No federal circuit court has yet ruled that a waiver in a prenuptial agreement can be an effective waiver of rights in a qualified plan. See National Automobile Dealers Retirement Trust v. Arbeitman, 89 F3d 496, (8th Cir., 1996); and Hurwitz v. Sher, 982 F2d 778 (2d Cir., 1992). However, it is interesting to note that, while both circuit courts held, in substance, that a "fiancée" is not a "spouse" and that, therefore, a waiver in a prénuptial agreement does not satisfy the requirements of the Internal Revenue Code, the Second Circuit observed in a footnote in Hurwitz, supra, that it was reserving judgment as to whether the prenuptial agreement in question would have been an effective waiver "if its only deficiency was that it had been signed prior to the marriage." Nevertheless, it is suggested that the safer practice continues to be to have those waivers signed after the parties are married. Indeed, Treas. Reg. § 1.401 (a)-20 appears to state clearly that the IRS position is that a waiver contained in an agreement entered into before marriage does not satisfy the applicable consent requirements of I.R.C. § 401(a)(ll)and4l7. Loss carry-forwards An often-overlooked asset is the "Loss Carry-Forward." Essentially, I.R.C. § 1212(b) allows a taxpayer to "carry forward" for an unlimited time capital losses from prior years, which could not be used because of the various limitations on the deduction of losses. See, e.g., I.R.C. § 1211(b). Obviously, those loss carry-forwards have a value in the nature of reduced taxes, which is dependent upon the incremental tax bracket of the particular taxpayer. At least some courts have determined that