W is for Withholdings – Tax Withholdings In Your Divorce

Tax Withholdings In Your Divorce

Most people don’t give much thought to the tax withholdings on their paychecks. Often these withholdings are determined by your employer when you first start your job and you submit your W-4. However, reviewing these withholdings is particularly important during a divorce because (1) a divorce is a life change for you, which may require you to adjust your withholdings; (2) the net income available to your soon to be former spouse is derived, in part, from his or her tax withholdings; and (3) whether you or your spouse do not contribute to Social Security can impact the division of your marital retirement assets.

Income taxes are withheld from your pay during the year for what the government estimates your total tax obligation. If your employer does not withhold enough income taxes through your paycheck, you will have taxes due when you file your income tax return. In the contrary, if your employer withholds too much during the year, you will receive a tax refund.  While a big tax refund may seem like a bonus, many financial experts view this as a negative, since you are essentially giving the government an interest-free loan.  In the context of divorce, by over withholding, you are limiting your available bi-weekly cash flow, which may not be necessary to satisfy expenses such as child support or alimony.

In addition to checking your personal income tax withholdings to account for your changing marital status, it is also important to review the income tax withholdings of your soon to be former spouse. A person’s income net of taxes is relevant in fixing temporary support and is specifically used to establish child support.  Many spouses going through divorce attempt to lower their payment obligation by over withholding taxes, therefor artificially reducing net income. This makes it appear that there is less net income available to pay support, when the reality is that the over withholding spouse will just receive a larger tax refund. It is important to double check your spouse’s tax withholdings to make sure that the net income being reported by that spouse is accurate.

Finally, reviewing the tax withholdings on you or your spouse’s paycheck is a quick way to determine if you or your spouse do not contribute to Social Security. Some professionals do not contribute to Social Security such as some members of law enforcement or firefighters, as their pensions are intended, in part, to replace this benefit. If you are the person that is not contributing to Social Security, you may be entitled to receive a Social Security off-set when dividing up your marital pension. If you are married to the person that is not contributing to Social Security, Social Security taxes should be removed from any income tax estimates utilized in calculating support obligations and may entitle that spouse to a Social Security off-set as noted above.

If you have any questions about this topic or any other family law related issue, please do not hesitate to contact the attorneys of Ulrichsen Rosen & Freed LLC.