For anyone going through a divorce, taxes are not the first thing on your mind. However, overlooking tax consequences can lead to costly mistakes. Taxes are embedded in many aspects of property division, retirement accounts, investments, and even real estate. Failure to consider tax implications can result in an unfair settlement and unexpected liabilities. Let’s look at some of the issues:
Retirement Accounts and Tax Liabilities
One of the most common tax pitfalls in a divorce involves retirement accounts. Many people assume that splitting assets equally means equal value, but that’s not necessarily the case. A $100,000 cash account and a $100,000 401(k) are not the same, retirement funds often have significant tax liabilities upon withdrawal. However, divorcing spouses can transfer retirement accounts tax-free through a Qualified Domestic Relations Order (QDRO). Without proper structuring, early withdrawals can trigger hefty taxes and penalties.
Investment Accounts and Capital Gains
Another common issue arises with investment accounts. If one spouse keeps a $100,000 investment portfolio while the other takes $100,000 in cash, they may not be receiving equal value. Investment accounts may have capital gains taxes which could reduce the actual worth when liquidated. Failing to account for these hidden tax costs can lead to an unfair settlement.
Real Estate and Tax Implications
Real estate can also pose tax challenges. If the value of the marital home has appreciated, selling it after divorce can result in capital gains taxes that exceed the home sale exclusion limits. It is important to understand these tax consequences before deciding who keeps the house or how proceeds from its sale are divided.
The Importance of Financial Professionals
Because of these types of complexities, consulting with a CPA or financial professional is highly recommended. Even attorneys can overlook tax implications, while a tax professional can spot potential problems and help with developing creative solutions. One of the advantages of a Collaborative Divorce is that a neutral financial professional is part of the team, who can help both parties to fully understand the tax impact of their decisions.
It is important to remember that divorce settlements involve more than just dividing assets; there are tax implications that play a major role in determining true value. Retirement accounts, investments, and real estate have hidden tax considerations that can impact the final outcome. Seeking professional advice will help to avoid unexpected liabilities and to ensure a fair settlement.
The Law Offices of Patrick Markey, P.C., are dedicated to a divorce process that creates better outcomes. Patrick Markey is an advocate for no court divorce options, such as Mediation and Collaborative Divorce.
Our offices are located at 108 Stetson Avenue, Suite 3500 in Chicago, Illinois. You may call us at 312-223-1764.