Depending on the extent of a couple’s assets, a divorce can raise some very complicated financial questions. The tax consequences of assets transferred during a divorce are dependent on a variety of factors. It is crucial to understand the potential implications of these transactions when dividing assets during the divorce settlement.
Generally, assets transferred between spouses or ex-spouses during a divorce are treated as gifts between spouses, which are exempt from federal income tax and gift tax, as long as the spouse is not a nonresident alien. The spouse who receives the assets assumes the tax basis and holding period for the assets. If the receiving spouse makes any subsequent changes, such as selling the assets, the gains or losses will be the same as if the original spouse still owned the assets. The spouse who forfeited the assets does not see an impact on their taxes.
For example, for a spouse who receives nonqualified stock options (NQSOs) from their employer, these are considered part of the marital assets and may need to be divided during the settlement. There is no tax levied on the NQSOs during the transfer, as they are treated as a spouse gift. The same rules apply with an incentive stock option (ISO), as an ISO cannot be held by someone other than the employee. The ISO becomes a NQSO when it is transferred to the non-employee spouse.
Receiving Spouse Taxed on Profits Earned from Transferred Asset
If the non-employee spouse exercises the options and makes a profit, he or she is responsible for paying taxes on that income, as if he or she was the employee who received them. This includes all employment taxes; such as Social Security, Medicare, and federal unemployment tax; in addition to federal income tax. Because the options are treated the same as if they still belonged to the employee, the rate of taxation will be based on the employee spouse’s year-to-date income.
Divorce is a difficult process for any couple, and it is hard to objectively evaluate assets during this emotional time. Tax implications for asset transfers can further complicate settlement negotiations and prolong the process. Having an experienced divorce lawyer in Baltimore at your side can help you navigate these complexities and find a resolution that satisfies everyone while protecting your interests.
Towson Divorce Lawyers at Huesman, Jones, & Miles, LLC, Represent Clients with Complex Marital Estates
Towson divorce lawyers at Huesman, Jones, & Miles, LLC, have the knowledge and experience to guide you through the process of dividing marital assets. We understand that every family is different, and we are committed to finding the solution that works for you so you can sleep well at night. With offices conveniently located in Hunt Valley, Towson and Pikesville, Maryland, we help couples throughout Baltimore County, Carroll County, Harford County and Howard County, including the communities of Towson, Columbia, Bel-Air, Elliott City, Westminster and Essex. Call us today at 443-589-0150 or contact us online for a confidential consultation with a qualified Towson divorce lawyer.