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Divorce and Taxes: What You Need to Consider

Contact the Baltimore County Divorce Lawyers at Huesman, Jones & Miles, LLC

Divorce has many financial implications for both spouses, both during the process and after the order is granted. Taxes are one area that can cause unforeseen consequences because most rules do not change because of a divorce. Always consider tax implications as fully as possible before you sign any settlement agreement or conduct negotiations toward that goal.

Capital Gains Built Into Assets

Never assume that the face value of the asset represents the actual value to you. There are certain assets that may have appreciated in value over the course of the marriage. Both the federal and state governments may be entitled to a portion of the capital gains, depending on the nature of the asset. These tax obligations may be even higher when the divorcing couple has a considerable net worth. You must always be mindful of potential tax obligations. Failure to account for these responsibilities may leave you in a worse position.

In some cases, the spouses may trade assets by giving the entirety of it to one spouse. Then, the other spouse would receive the entirety of another asset. Each of these assets may be fundamentally different in nature and tax obligations. For example, if you and your spouse have owned a piece of investment property for decades, a considerable tax obligation may come due if it is sold. Even if the property is never sold, the heirs may need to pay taxes if they inherit it and decide to sell it. In other words, the asset’s value may not be what you think.

If the couple chooses to sell their primary marital residence, there may still be tax consequences. Remember that there are exclusions that could mean that you do not pay taxes up to a certain amount of capital gains. However, given the sharp increases in property values, it may be more likely that a couple could owe some taxes on the sale of a home.

Further, the amount shown in retirement accounts is before any tax obligations. A 401(k) may be divided between the spouses in a divorce, and the spouse who receives a share of the other’s retirement account would need to pay taxes, so they would not receive the total amount.

The Status of Deductions

The divorcing couple may have certain tax deductions, whether for property they own or dependents. They would not necessarily lose these deductions in a divorce, but they would need to determine how they are to be allocated among the spouses. Usually, the spouse with whom the children live would get the deductions, but these are subject to negotiation in a separation agreement.

How to File Taxes While the Divorce Is Pending?

The divorcing couple has the option to file taxes either separately or jointly while the divorce is pending. Filing a joint tax return may require trust and cooperation, depending on whether the divorce is contentious. However, there are certain benefits to filing taxes jointly, so the couple should consider this option if it is at all possible.

Alimony

Alimony does not have the same tax treatment as it used to in divorce. In the past, the paying spouse could take a tax deduction for the amount they paid, while the receiving spouse treated the spousal support as income. Now, a paying spouse can no longer claim a deduction for what they have paid in spousal support. Thus, the real effect of paying alimony could be even more magnified for the paying spouse.

Contact the Baltimore County Divorce Lawyers at Huesman, Jones & Miles, LLC

The Baltimore County divorce lawyers at Huesman, Jones & Miles, LLC can point out issues you may otherwise overlook. We can review your circumstances and help you with a settlement negotiation or litigation strategy. You can schedule a free initial consultation with one of our divorce lawyers by calling us today at 443-589-0150 or contacting us online. We have offices in Hunt Valley and Towson, Maryland, and we work with clients in Baltimore, Baltimore County, Bel Air, Bentley Springs, Columbia, Freeland, Hereford, Hampton, Westminster, Essex, Monkton, Sparks Glencoe, Parkton, Phoenix, Pikesville, White Hall, Carroll County, Harford County, and Howard County.

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