Death and taxes – those two things are certain in life. However, with half of all marriages ending before “’til death do us part,” divorce and taxes could be something you face in your life. Just because assets are split doesn’t mean the process is simplified. High-asset couples often face a complicated tax situation and divorce can add another pile to the paperwork.
Asset division is usually the most contentious point of a divorce. People are more financially vulnerable after a marriage ends, and failure to consider tax liabilities can lead to unwanted burdens down the road. When asset division is near 50/50, the black and white numbers can look even, but is the money green in the color of life?
How can a person going through divorce maximize financial security while minimizing tax liability? No one can absolve their legal responsibility, but with the right guidance, there is a balance to be found between duty and disunity.
Capital gains taxes
Items with monetary value are usually subject to taxation when they transfer from one person to another. However, taxes can be avoided if divorce is cited as the reason for the exchange. Still, accumulated assets like mutual funds and stocks that change value over time may be subject to a capital gains tax when one ex-spouse “purchases” the account from the other.
Payments for spousal maintenance have tax implications for both the payer and the beneficiary. Alimony payments are tax-deductible for the paying spouse and taxable for the ex receiving them. The spouse making payments must also be careful to consider the timing of payments. Paying too much too soon in alimony as well as ending payments when a child becomes an adult can trigger attention from the IRS.
Children and dependents
The spouse that is awarded primary custody of children will also be able to claim them as dependents. Unlike alimony, child support is not tax-deductible for the paying spouse, but it is possible that the larger settlement could offset the tax implications.
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Taxes and divorce are multifaceted issues with lifelong implications. Although you could be single soon, your tax issues should not double. When there are few certainties in life, it is important to take the time to do divorce right.