When you're going through a divorce and working towards a settlement, an experienced Florida family law attorney will advise you to look beyond the immediate financial impacts of the settlement to consider longer-range tax implications. If assets aren't correctly divided, you could end up with tax obligations you didn't anticipate. That's why many people have tax and financial advisors on their divorce "team" in addition to their attorney.
Following are some areas that can have serious tax implications down the road if not handled properly during the divorce. We won't go into detail here because you should seek the advice of a tax professional. However, it's important to discuss these issues with your team.
-- Retirement accounts: Nearly everyone has an IRA, 401(k) and/or some type of retirement account. If those aren't handled properly, you can end up paying steep withdrawal penalties. For some types of retirement accounts, a Qualified Domestic Relations Order is used to designate how the funds will be divided.
-- Brokerage accounts: When you're dividing up stocks and bonds, it's essential to know what the tax basis is for each so that the two of you share equally in the capital gains tax obligations.
-- Homestead exemption: Florida allows portability of this exemption under the Save Our Homes provision of the state's homestead exemption amendment. This is a tax provision that you can take advantage of if you're selling your marital home and dividing the proceeds
If you and your spouse have children, the exemption for dependent children is a big factor in how much you pay in taxes. According to the IRS, only one parent can claim the child as a dependent. Generally, that's the custodial parent. However, that parent can release his or her exemption claim to allow the non-custodial parent to claim the child as an exemption. This is something that should be discussed and determined during custody negotiations.
It's understandable that with everything else on your mind during a divorce, taxes often slip far down the list. That's why it's essential to have professionals on your side who don't let that happen. Even with a good divorce settlement, your financial situation is likely to change, at least in the short term. Why hand money over to the government when you don't need to?
Source: Huffington Post, "4 Hidden Tax Issues in Your Divorce," Stann Givens, June 13, 2016