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Considering tax issues in divorce

On Behalf of | Aug 17, 2020 | Firm News |

Marital dissolution can be one of the most challenging emotional issues an individual will ever face. In marriages involving high or complex assets, the process becomes even more difficult to navigate because of the sheer scope and intricacy of property division.

If you are facing an impending divorce or are working through a separation right now, keep tax considerations at the forefront of your mind during negotiations.

Taxes and retirement assets

Tax restrictions can create value disparities between two assets with seemingly identical values. To access retirement benefits, you – or your ex – must pay income tax on any payouts. For the purposes of property division, these taxes lower the actual value of the asset.

For example, consider a retirement account valued at $250,000 and a bank account containing $250,000. These assets appear equal. In all likelihood, the money in the bank account has already been taxed, meaning that it will suffer little to no decrease in value when that money is accessed. Therefore, the bank account technically has a higher liquid value than the retirement account.

Retirement accounts themselves are tricky assets to divide during divorce and often require special agreements. If a retirement account is on the table during property division, contact an attorney to help you protect your asset.

Taxes and alimony

Every marital situation differs from the last. When couples split, divorce extricates their income and assets, often leaving one former spouse at a significant financial disadvantage moving forward. Alimony, or spousal support, can address that disadvantage.

However, few couples consider the effects of taxes on alimony. The spouse receiving the alimony is responsible for paying taxes on whatever they receive. For the spouse who requires financial support, getting less alimony than initially expected can cause problems beyond just maintaining quality of life.

When negotiating alimony payments, make sure to factor taxes into the final amount to avoid having to pinch pennies until your situation stabilizes. Talk to an experienced divorce and family law attorney about your financial needs during and after divorce.