Tax Issues in Divorce

Divorce is emotionally painful, and it can also hurt financially. From splitting retirement and other assets to negotiating child and spousal support, there are tax and financial landmines that forethought and planning can help you avoid.

RETIREMENT ASSETS

Retirement plans are often a source of disagreement in divorces. When proper procedures are followed, the transfer of retirement assets to a divorcing spouse’s retirement account is typically tax-free. It’s important to consult legal and tax professionals to learn how to avoid setting off tax alarms, as procedures for a tax-free split of IRA and 401(k) plan assets differ. And a divorcing individual will usually want to avoid taking a direct distribution to give to a spouse, due to its negative tax effect.

DOING THE SPLIT

Other asset splits will produce varying tax and financial consequences. Is a buyout better than paying capital gains taxes on property? If so, a divorcing individual who buys out previously joint property in a settlement should try to avoid withdrawing retirement assets to pay for it, which can trigger early distribution penalties and additional income taxes.

How will a state’s community property laws affect the transfer of assets? Divorcing couples need the answers to these and other questions, including the tax treatment of spousal and child support and who gets to claim children as dependents on their tax return after divorce.

PLAN NOW

No one gets married planning to get a divorce, but it happens. If this happens to you, try to resolve issues as swiftly and amicably as possible. The longer things drag out, the more complicated issues can become. And, if you are thinking about marriage and have substantial assets, consider a prenuptial agreement to protect what is yours.