The divorce process is often incredibly stressful and emotionally draining for everyone involved, which can make an already complicated process even more difficult to understand and prepare for. One major issue to look out for are hidden tax consequences you may or may not be aware of. While an experienced family law attorney can help you navigate this process to help you secure the beneficial outcome you need without falling into any of these potential consequences, it’s important to have a better understanding of these issues before you are too deep into the process.
The Homestead Exemption
Depending on where you live, you may need to worry about who will receive the homestead exemption if you choose to sell your marital home. If you and your spouse choose to follow this path and split the money you get from selling the house along with the rest of your assets, you will need to work out who gets to take advantage of this tax provision. Make sure to speak with your attorney if this is the decision you and your spouse are planning to make.
The Dependency Exemption
This issue will likely be addressed when determining which spouse will receive primary custody of the children, but is important to look out and plan accordingly for.
Dividing Retirement Accounts
If you and your spouse are dividing an IRA, you need to be careful when deciding how to transfer money. Simply withdrawing half of the money and writing a check to your spouse to place in their IRA will result in you needing to pay income tax on the withdrawn amount. You need to have your broker transfer the funds directly from one IRA to the other in order to avoid this tax hit.
If you are splitting a non-IRA retirement account, you need to follow a similar process. However, transferring funds from these accounts require a signed Qualified Domestic Relations Order (QDRO) first. This order describes the portion of the account being transferred, and creates an exception to the IRS rule that previously stated that the only way to transfer funds out of these accounts was to pay it directly to an employee. In order to obtain this, you simply need to request it from the judge overseeing your case.
Dividing Stocks
If you and your spouse own stocks, chances are you didn’t buy all of them at the same time. When dividing these assets, it’s important to separate them based on the price per share in order to prevent any unevenly divided tax obligation. For example, let’s say that you and your spouse own 300 shares of Google stock, but you bought those shares at two different times. You bought 100 shares for $200, and bought the other 200 for $350 per share – when dividing these stocks, you need to ask your broker to separate the brokerage account to make sure that the records show both you and your spouse receive equal shares of both groups of stock. Doing so will ensure that you both have the same capital gains tax obligation tied to the Google stock.