Divorce can have important tax implications
When considering whether to divorce your spouse, be sure to make plans to address your new tax situation.
It is no secret that making the decision to file for divorce can be stressful. Indeed, for many individuals, the process can be overwhelming. Besides issues of child custody and visitation, divorce also involves important financial considerations, such as child support, alimony, division of assets and division of debts. These issues can also have important tax implications.
In most cases, courts attempt to make an equitable distribution of a divorcing couple’s assets. This means that the court will examine assets and debts and split them evenly so that couples leave the relationship with as equal a share as possible.
In cases where a couple’s primary assets are their primary home, bank accounts, retirement accounts and other personal property, the process is fairly straightforward. Things can be more complicated, however, when a couple has more than one home, 401(k)s, pensions, rental properties and other such assets. In these cases, it is important to get advice from professionals about not only the fair market value of these assets, but also the tax basis.
When considering how best to divide these sorts of assets, it is essential to consider the ways in which the division will impact each person’s tax situation. For example, receiving assets such as household furniture does not have any income tax impact. When it comes to other assets, however, such as rental property or brokerage accounts, a recipient spouse may realize income that is immediately taxable or realize a loss that he or she must bear.
It is particularly important to keep tax issues in mind when dividing retirement accounts, such as 401(k)s and IRAs. For example, early withdrawal from a 401(k) usually results in a serious tax penalty. Divorcing couples may, however, be able to make a withdrawal from their 401(k) accounts, provided that the withdrawal is required by the divorce decree and done using a Qualified Domestic Relations Order. A QDRO establishes that a person other than the account holder is entitled to a portion of the account and protects the account holder from early withdrawal penalties and fees.
The reality is that the divorce process presents many emotional and practical challenges. Fortunately, you do not have to go through it alone. An experienced divorce attorney can provide you with essential guidance about your rights tailored to your circumstances. If you are considering divorcing your spouse, do not delay: contact an experienced divorce attorney today to learn more.
Keywords: Divorce