Al and Tipper Gore's inconvenient divorce means their finances will be affected

An inconvenient divorce: How will this affect Al and Tipper Gore's finances?There was no tell-all article in a national gossip magazine. No racy photos. No whispering about an unexpected pregnancy. Just an e-mail.

After 40 years of marriage, Al and Tipper Gore announced they were calling it quits. The e-mail that announced their split said simply:
"After a great deal of thought and discussion, we have decided to separate. This is very much a mutual and mutually supportive decision that we have made together."
Al Gore, 62, and Mary "Tipper" Gore, 61, had been married since May 19, 1970. Their love story became political history after the couple shared a now famous kiss at the 2000 Democratic National Convention.

Their subsequent careers (and Gore's well-to-do family) resulted in considerable wealth. Just before their split, the couple was said to own homes in both Nashville and Carthage, Tenn., and recently purchased a multimillion-dollar home in Montecito, Calif. A Bloomberg piece written last year estimated Gore's wealth at more than $100 million.

Despite the new digs, a Gore spokeswoman, Kalee Kreider, has said that both Gores consider Tennessee their residence. That makes filing for divorce a bit easy: Tennessee divorce laws are not terribly complicated. After a cooling off period, a judge may grant an uncontested divorce; in Tennessee, you may also be legally separated.

While the Gores are still well known, they are no longer subject to the kind of scrutiny they once were. Gore was famously criticized after the release of his 1998 income tax returns showed he wasn't as charitable in dollars as his image might suggest. Those tax returns were made public while he was in office (you can see returns for Obama and Biden -- as well as historical returns for Bush and Clinton -- here).

Now that he's no longer in public office, Gore's tax returns will stay private. But the Gores have achieved a level of fame that brings with it a certain amount of curiosity and speculation. Whether we care to admit it or not, we want to know what happens to folks like them when things go badly. More to the point, we want to know: what will happen to their stuff?

It's a bit unclear what the split will mean for the Gores financially, since we don't know how they've arranged their finances -- or whether there was a prenuptial. On the one hand, he's from a wealthy family, but on the other hand, they started dating in the 1960s when prenups weren't quite so popular. I suspect any distribution issues have already been considered.

But we can surmise a little bit about the tax consequences of all this. It's particularly interesting since President Clinton was an opponent of eliminating the so-called "marriage penalty" while Gore was Vice President. Relief for the marriage penalty was eventually passed and signed into law during the Bush administration. Ironically, it's slated to expire next year, the first full year that the Gores will likely file as single.

For tax purposes, your filing status is determined as of the last day of the calendar year. So even if the Gores were to stay together throughout 2010 -- but divorce on December 31, 2010 -- they would still file as divorced. So for 2010, you can pretty much count on them filing as single and avoiding the marriage penalty altogether -- a welcome move for those in higher tax brackets like the Gores.

As far as any support goes, the equation is fairly easy. My guess would be that, barring a pre-nup to the contrary, Al will be required to pay spousal support to Tipper. For federal purposes, spousal support (alimony) is an above-the-line deduction for the payer. This means that the person who pays the support may take the deduction even if he or she does not otherwise itemize. From a tax perspective, it can be pretty advantageous to pay alimony.

On the recipient's side, it's not such a win. Payments that are characterized as qualified alimony payments are considered taxable to the recipient. That means the payments must be reported as income.

The key to figuring all this out, then, is to decide whether payments are classified as alimony for federal income tax purposes -- or if it's something else (a gift? a payoff?). The IRS has a number of criteria to determine whether a payment is considered alimony. In brief:
  • The couple must not live together or file a joint return with each other;
  • Spousal support payments need to be made in cash or cash equivalent and not consist of real or tangible property;
  • The divorce decree (or maintenance agreement) must require the payment and not otherwise say that the payment is not alimony (voluntary payments do not count);
  • There is no liability to make the payment after the death; and
  • The payment is clearly not child support.
The last item is easy in this case. The Gores have four children, Karenna, Kristin, Sarah and Albert III, all of whom are now adults. As such, there are no child support issues. If there had been, it wouldn't change the tax picture since child support is considered tax neutral. That means it's neither deductible to the payer nor taxable to the recipient.

As with Tiger Woods, it can be entertaining to speculate about the financial and tax consequences of divorce when it comes to the rich and famous. Figuring out the answers to tax puzzles is what I do for a living -- and it's fun to try and put the pieces together in real life scenarios. But I realize -- like you -- that these are real people who have a history together beyond the press. The state of their finances and taxes notwithstanding, I hope this decision brings both of them some peace.
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