Tax Consideration of Dividing Property in Divorce
Tax Considerations of Dividing Property in Divorce
Be aware of important tax implications of asset division incident to marital dissolution
Property acquired during the marriage is generally considered marital property. Tennessee is an equitable distribution, or common law, state where the court will determine what is a fair and equitable division of the assets. Factors a court will consider in the division include:
- Length of marriage
- What property each spouse brought to the marriage
- Earning power of each spouse
- Child rearing responsibilities of each spouse
- What retraining would be needed to make a spouse employable
- Tax consequences of asset distribution
- Debt allocation
During the process of dividing assets, it is very important to consider tax implications as they can have serious financial consequences. As a general rule, transferring property to a former spouse due to a divorce will not cause a gain or a loss for tax purposes. The transfer must happen within one year after the final divorce decree to fall under this general rule or the transfer must be pursuant to a divorce decree and occur within six years after the marriage ends.
Additionally, the transfer of marital property pursuant to a property settlement agreement incorporated into the final divorcee decree is not subject to a gift tax.
Another important consideration when dividing property is that alimony payments are generally deductible by the payor and must be included in the gross income of the recipient (as opposed to child support payments which are not deductible by the paying spouse and are not taxable to the recipient spouse). This is important to remember because one spouse may try to push for a low property settlement and pay a higher alimony instead to get the tax deduction.
Additional tax considerations if you are thinking about filing for divorce include:
- Timing: Federal tax law dictates that you are considered married for tax purposes if you are legally married according to state law on December 31st. If you want to file you taxes as married filing jointly you will want to consider waiting until the new year to file for divorce. Just know that if you file jointly, you both will be liable for tax liability or any fraud in the tax return.
- Children: If you have custody of your child for more than half of the year, the IRS allows you to claim the dependency exemption. However, the entitlement to the dependency exemption can be negotiated. If you will be the primary custodial parent, you can use the dependency exemption in divorce settlement negotiations, offering to waive your right to the exemption in exchange for something else.
- Retirement accounts: Early withdrawals from retirement accounts can be heavily penalized. However, in the event of divorce, an employee spouse may withdraw or transfer funds to the non-employee spouse without penalty. The intent to withdraw retirement funds during a divorce must be specified in a qualified domestic relations order for the withdraw to be made without penalty.
- Selling assets: Selling a capital asset can result in capital gains taxes even if it is part of the property division. Consider that you may be liable to pay the capital gains tax if you are awarded the proceeds from the sale of the capital asset when negotiating the marital settlement agreement.
Divorce is an emotional rollercoaster and it can sometimes feel like the process is consuming your life. Don’t let things get worse by having lasting tax consequences because of a poorly-negotiated divorce settlement. Contact the trusted Murfreesboro divorce attorneys at Kidwell, South, Beasley & Haley. Our attorneys have a thorough understanding of divorce proceedings and the potential implications divorces can have on their client’s financial future. Contact Kidwell, South, Beasley & Haley today online, or call 615-893-1331 to schedule a free consultation.