One of the complications of going through a divorce is deciding how to divide assets. This becomes even more complicated when considering the tax implications of the division.
Even if division seems equitable on the surface, it may be more of an unfair division when considering how taxes affect value. Understanding some of the key implications may help divorcing spouses make more informed choices.
Child dependency
According to the Internal Revenue Service, even if parents have 50/50 custody of a child, they must decide who gets to list the child as a dependent on their tax return if filing separately. If a divorce agreement gives a noncustodial parent the right to take the deduction, the custodial parent must sign Form 8332.
Tax filing
If the couple is still a legal partnership by year’s end, they must figure out the best filing status to minimize tax implications. Choosing married filing jointly often results in fewer taxes due, but choosing married filing separately means that each spouse pays only the taxes due on their return.
Property and asset transfers
The transfer of real estate or other assets does not have a tax implication. However, the sale of the asset may have unwanted implications that the divorce agreement should consider. The CPA Journal discusses the importance of considering the cost basis as well as the fair market value of transferred assets.
Retirement division
Not all retirement accounts have the same tax implications. Traditional IRAs and 401ks are taxable upon distribution, while Roth IRAs have tax-free distribution. A Qualified Domestic Relations Order can minimize some of the tax-related issues.
Business division
If the couple are joint business owners, this complicates things even further. Along with determining a fair value of the business, the partners should consider other tax consequences associated with either the sale of the business or an ownership buy-out.