Sept. 20, 2016
What You Can Learn About Divorce & Taxes from Brad Pitt & Angelina Jolie
Kelly Phillips Erb Forbes Staff I cover tax: paying tax is painful but reading about it shouldn’t be.
Years ago, I found myself sitting in law school in Moot Court wearing an over zed itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future, I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I earned an LL.M Taxation. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. At one such audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax. Just like that, Taxgirl® was born.
Angelina Jolie has filed for divorce from actor Brad Pitt, citing “irreconcilable differences.” The news was reported by entertainment website TMZ and confirmed by Jolie’s attorney, Robert Offer, in a statement to Reuters. Offer said, about the matter: “This decision was made for the health of the family. She will not be commenting, and asks that the family be given its privacy at this time.”
Writer-director-producer-actress Angelina Jolie Pitt (L) and actor-producer Brad Pitt arrive for the opening night gala premiere of Universal Pictures’ ‘By the Sea’ during AFI FEST 2015 presented by Audi at the TCL Chinese Theatre in Hollywood, California on November 5, 2015. AFP PHOTO / MARK RALSTON (Photo credit should read MARK RALSTON/AFP/Getty Images)
Those dreaded “irreconcilable differences” are said to include divergent parenting styles and concerns over Pitt’s behaviors. Those behaviors do not, however, appear to extend to allegations that Pitt was involved with someone else. Rumors that Pitt was seeing actress Marion Cotillard on the set of their movie, “Allied,” are untrue, according to reports.
Why would that even matter? If you have to ask, you were clearly never on #TeamJen. Pitt met Jolie while he was married to Jennifer Aniston. Aniston was fresh off the final season of the hit show Friends and considered something of America’s Sweetheart while Pitt was filming “Mr. & Mrs. Smith” with Jolie. Aniston and Pitt divorced in 2005 after just five years of marriage and some fans labeled Jolie the cause. Jolie and Pitt quickly became an item but didn’t marry until 2014 (Jolie has previously been married to Elementary’s Jonny Lee Miller and Billy Bob Thornton). As a nod to their controversial beginning, it’s been alleged that the couple’s prenup includes an “adultery” clause (more on the prenup in a moment).
Jolie and Pitt have a total of six children. Jolie adopted three of the children as a single mother; Pitt subsequently adopted all three. Jolie is reportedly asking for physical custody of all six children.
Jolie and Pitt have a combined estimated net worth of least $400 million. Since their relationship started, the pair has continued to work in movies.
Jolie received an Academy Award nomination (Best Actress) for her role in Changeling in 2009; she was a previous Academy Award winner (Supporting Actress) for her work in 2001′s Girl, Interrupted, and enjoyed commercial success in a number of films including the title role in 2014′s Maleficent. She was named the world’s most powerful celebrity in Forbes’s 2009 Celebrity 100 issue and was named to Forbes’ Hollywood’s highest-paid actress lists in 2009, 2011, and 2013 (see Jolie’s Forbes profile here).
Pitt has also continued to work steadily. He has been nominated for six Academy Awards and took home the Best Picture trophy for his work as a producer on the 2013 film, 12 Years a Slave (he also had an acting role in the film). Pitt came in at #94 in this year’s Forbes’ Celebrity 200 (see Pitt’s Forbes profile here.)
With such a high-profile power couple, it’s inevitable that rumors will fly. Realistically, while we may never know the specifics of what went on behind their closed doors (Jolie and Pitt were notoriously private despite being high profile stars), the issues raised in their relationship and divorce are the same as those faced by you and me. Only with a lot fewer zeros. Here are some things to know about divorce and taxes whether you’re a parent working in an office or on film:
First things, first: filing status. For federal income tax purposes, filing status is determined as of the last day of the tax year. So if you’re married on December 31 under the laws of your state, you’re married for tax purposes. If you’re not married, you must file as single or head of household. Exceptions apply for widows and widowers, annulments, and married persons who live apart but meet very tailored criteria.
When it comes to Jolie and Pitt, they weren’t married for very long. Those tax years 2005 to 2013? The years before the marriage? No matter how in love or how together the pair were during those years, for federal income tax purposes, they were considered unmarried. Interestingly, even though they’ve been together in the public eye for more than a decade, they could have only filed as married for two years: 2014 and 2015.
Moving forward, Jolie and Pitt will likely now file as single for federal income tax purposes. This is because those subject to a legal separation are considered “unmarried” for purposes of federal income tax. In some states like Pennsylvania, there is no such thing as legal separation, making the analysis a bit different; there is legal separation in California. (You can find out more about filing status here.
What about the engagement ring? Remember the ring? Jolie’s specially designed engagement ring cost a reported $250,000 in 2012 (adjusted for inflation only in today’s dollars, it’s worth $262,035.38). Under the laws of most states, the ring would stay with the bride. An engagement ring is considered a promise to marry. If the engagement is broken, the ring goes back. But if the wedding actually takes place, the ring stays put – even if the marriage doesn’t. So Jolie takes the ring and she does so with the original cost basis. That’s because, for tax purposes, the basis of property transferred by a spouse or former spouse if the transfer is incident to divorce is the same as the spouse’s adjusted basis. If the ring is sold later, Jolie’s gain would be calculated at the selling price less Pitt’s basis in the gift – the exact same analysis for all taxpayers. (You can find out more about basis here.)
What about alimony? According to reports, Jolie, whose net worth is thought to be less than Pitt’s, is not asking for spousal support. But if she does, spousal support (or what you and I sometimes call alimony) would be based on the “reasonable” needs of the parties in accordance with the lifestyle and standard of living that was enjoyed by the parties during the marriage. For tax purposes, alimony is taxable to the recipient as ordinary income. On the flip side, it is deductible to the payor as an “above the line” deduction, meaning that it is available as a deduction even for those taxpayers who don’t itemize.
To qualify as alimony for purposes of a federal income tax deduction, payments must be court ordered (or by legal agreement) and you must be divorced or under a separation order: voluntary payments don’t count. You cannot be living under the same roof as your spouse/ex-spouse when you make the payments unless you meet an exception due to a court order, and you cannot claim alimony in a year that you file a joint tax return with your spouse/soon to be ex-spouse