An often-cited belief is that 50% of marriages now end in divorce. A tax practitioner can greatly help people going through a divorce by reducing the overall stress of the divorce process and providing the clarity needed to make good financial decisions for the future.
When dividing assets in divorce, the tax considerations can be straightforward in simple situations, but can become complex very quickly when the assets are larger and more diverse.
- Internal Revenue Code Section 1041 provides that no gain or loss is recognized on the transfer of property between spouses.
- The principal residence is a typical asset that is discussed and awarded during a divorce. IRC Sec. 121 allows joint filers to exclude up to $500,000 of gain on the sale of a residence, and individual filers can exclude up to $250,000 of gain. This difference can provide a tax planning opportunity for some divorcing couples.
- Retirement plans come in many forms and are also a common asset to be discussed and divided during a divorce. Pensions and Profit-Sharing Plans cannot be assigned from one spouse to the other without a qualified domestic relations order (QDRO). However, an individual retirement account does not need a QDRO to be divided. These assets also have built-in income tax consequences because most distributions from retirement assets are taxable to the person who receives the distributions.
- Other assets and activities of higher-net-worth divorcing couples will also need to be divided. Each of these assets should be reviewed for income tax implications and opportunities. When dividing passive activities, advisers should also consider how the income or loss from the asset will be treated for tax purposes in the future.
An equitable division can be difficult to achieve, but by understanding the tax treatment of the different assets, a more equitable division can be achieved.
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Additional information included in this report was provided by PDI Global / Thomson Reuters © 2023