Tax Implications of Asset Division in Teaneck
Managing the financial repercussions of a divorce is often challenging. You must be prepared, informed, and mindful when negotiating your divorce settlement to account for any tax issues that may come later.
Work with a family law attorney from Moskowitz Law Group when you are considering divorce. We can explain the tax implications of asset division in Teaneck and ensure your settlement does not trigger any unanticipated taxation issues.
Divorce Changes Your Filing Status
When you are divorced, your filing status changes from married to single or head of household. Your status on December 31st is your status for the entire preceding year. Thus, if your divorce is finalized in late December before the 31st, you must file as if you were unmarried for the entire year.
If you have children, you and your former spouse must determine who will get the dependency exemption and Child Tax Credit, if applicable. If one parent has the children most of the time, that parent usually takes the exemption, but other arrangements are possible. Parents who share equal custody often alternate years or split the exemption and Child Tax Credit in some other way.
These changes can impact the tax you must pay. Thus, it is important to consider this when divorcing. A Teaneck family law attorney can review your case and suggest strategies to ease the immediate tax implications of your divorce.
Asset Transfers May Be Eventually Taxed
Transferring assets between spouses pursuant to a marital settlement agreement does not usually cause a taxable event. The tax considerations usually arise later when one party wants to sell an asset they obtained through the division of marital property.
Real estate and some other assets may be subject to capital gains taxes when they are eventually sold. The amount of the gain that may be taxable is based on the value of the asset when the spouses purchased it, not when it was transferred as part of the marital property settlement. When the asset is a piece of real property, a divorced former spouse may claim an exclusion of $250,000 if they have lived in the property for at least two of the preceding five years.
It is critical for a spouse to maintain good records regarding an asset that could be subject to capital gains tax, which may require the cooperation of the other spouse in providing records of the purchase and any improvements. In addition, Teaneck divorce attorneys must consider the tax ramifications of selling an asset when determining a fair distribution of the marital property.
Special Considerations When Dividing Retirement Funds
Pensions and employer-sponsored retirement savings plans like 401(k) and 403(b) plans are marital property and assets subject to division in a divorce. However, depending on the recipient spouse’s age when the divorce becomes final, they may not have immediate access to the funds in these plans without incurring a tax penalty. A fair division of these assets also requires establishing the future value of a pension, which may require input from an actuary.
The federal Employee Retirement Income Security Act (ERISA) governs these plans and the law prevents the plan’s administrator from paying benefits to anyone but the plan participant or their beneficiary. When a marital settlement agreement in Teaneck designates a portion of the plan to go to the plan participant’s ex-spouse, there may be tax implications if the plan participant withdraws funds and pays them directly to their spouse.
A divorce attorney could draft a Qualified Domestic Relations Order (QDRO) to resolve that issue. A QDRO is a court order authorizing the plan administrator to pay a specified portion of the plan to the former spouse. The QDRO can direct when and how the administrator should transfer the funds. Some ex-spouses choose to receive the funds upon divorce and roll them over into an IRA or similar account to preserve the tax advantages afforded by these retirement vehicles. Alternatively, the recipient could choose to receive payments once they reach retirement age.
Consult a Teaneck Family Law Attorney About the Impact of Divorce on Taxes
The tax implications of asset division in Teaneck are critical aspects of divorce. Miscalculations or misunderstandings could lead to significant unanticipated tax liability down the road.
The divorce lawyers at Moskowitz Law Group have substantial expertise and a network of specialists to provide opinions when necessary. You can rely on us to consider the long-term impact of your divorce settlement and minimize the tax implications to the extent possible. Get in touch today.