Show me the Money!

7/11/2012

Recently, while most of America was still digesting news of the Supreme Court’s decision on healthcare reform, more news hit the wires – Hollywood A–listers Tom Cruise and Katie Holmes are divorcing. News of the split comes at nearly the same time as Forbes naming Cruise the world’s top–earning actor. His latest blockbuster, #4 in the Mission Impossible franchise, pulled in a whopping $700 million, powering Cruise to a $75 million year. With that much money at stake, it’s natural to be curious about what the divorce means for the IRS.  

Divorce is sometimes pretty straightforward, at least from a tax perspective. Property settlements between divorcing spouses are generally tax–free. Alimony or spousal support is usually deductible by the payor and taxable to the payee. Child support is both nondeductible and nontaxable – it’s strictly an after–tax obligation. And legal fees are a nondeductible personal expense, except for amounts allocated to figuring alimony payments or tax planning during the divorce proceedings.  

But celebrity divorces can be risky business. Sometimes it’s hard for outsiders to understand the stakes, which can be quite different from ordinary splits. The Cruises had a prenup, of course. It reportedly gave Katie $3 million for each year of marriage, plus a 5,878 square foot house in Montecito, CA. And last year, Cruise deeded Holmes an apartment in Manhattan. It’s important to understand that prenuptial agreements aren’t always bulletproof – golfer Tiger Woods also had one limiting wife Elin Nordegrin to $20 million, but she wound up with five times that amount. When dealing with that amount of money, divorce proceedings and taxes become very interesting.  

Even if you aren’t a multi–millionaire, married or unmarried, you should always be aware of how your finances are integrated with others and how your decisions affect your personal wealth and your taxes!