Divorce can have significant tax implications for individuals, and having a comprehensive understanding of these implications is crucial for effectively navigating the financial aspects of a divorce.
In this article, we’ll go deeper into the different tax factors that divorcees should be aware of, giving them helpful tips on how to reduce their tax obligations and make wise financial decisions.
Property Division
Property division can have significant tax consequences when assets and property are divided following a divorce. Although the majority of property transfers resulting from divorce are tax-free, divorcees should understand the longer-term tax implications of decisions around dividing assets in a divorce. Divorcees can limit their tax liabilities by making informed judgments and by being aware of these aspects.
Retirement Accounts
Divorce can significantly impact retirement accounts, such as 401(k)s and IRAs. It is crucial for divorcees to be aware of the tax consequences and potential penalties associated with dividing these accounts during a divorce. It is possible for a retirement account to be split between spouses during a divorce without any tax liabilities.
However, tax rates are typically higher for retirement accounts, compared to other types of investments, when the accounts are liquidated. For this reason, it is typically recommended that each spouse receives approximately the same amount of retirement assets. Without this, you could be setting yourself up for a higher tax burden in the future.
“Taxable” Investment Accounts
This is an investment account that isn’t a retirement account (IRAs, 401(k), 403(b)s, pensions, etc.). They are typically owned jointly with your spouse but might be owned individually by either of you. The manner in which these assets are divided can create unexpected tax consequences. When assets in this type of account are liquidated, capital gains taxes will likely apply. The capital gains tax is calculated by subtracting the sale price from the purchase price. The more that an investment has grown, the more potential capital gains tax.
You could find yourself in a situation where you and your spouse divide the taxable accounts equally. But if you receive the investments that grew more than the assets that your spouse
receives, you could be setting yourself up for a larger tax burden. A solution to this is to divide each investment – that is, each stock, bond, mutual fund, etc. equally. This can allow you and your spouse to have a similar tax situation, when it comes to these assets, after the divorce.
Filing Status
Determining a divorcee’s filing status is an important tax factor to take into account. After a divorce, individuals may be eligible to file as single or as head of household. Divorcing people should be fully aware of the advantages and disadvantages of each filing status, as well as the applicable tax brackets. With this information, they are better equipped to choose wisely and maximize their tax status.
Dependency Exemption and Child Tax Credit
After a divorce, parents frequently have concerns about claiming the dependency exemption and child tax credit for their kids. Divorcing individuals can increase their tax savings by having a complete awareness of the guidelines and procedures for claiming these tax benefits. This knowledge empowers them to make strategic decisions that align with their financial goals.
Tax Planning Strategies
These strategies may include maximizing deductions, coordinating tax planning efforts with a former spouse, and seeking professional tax advice to ensure compliance with tax laws.
By considering the various tax aspects of divorce, divorcees can minimize tax liabilities, maximize tax savings, and ensure a seamless transition into their post-divorce financial life.
At Purposeful Wealth Advisors, we understand the complexities of divorce and money distribution. We’ll work closely with other dedicated professionals – divorce attorneys, and accountants – to arrive at comprehensive solutions.
Contact us today to learn more about how we can help you.
Any opinions are those of Mary Kraszewski and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
