Asset valuation, a complex part of any divorce, is even more complicated by the tax implications of high-asset divorces. Many spouses rely on professional counsel to fully understand the consequences of the divorce process on their retirement accounts and marital assets, including the tax implications of withdrawing from, splitting, or closing these accounts.
The tax implications of high-asset divorces mean couples must advocate for their best interests during divorce negotiations. A family law attorney with experience in high-asset divorces can provide guidance on how your tax status, income, and retirement assets may change after your divorce is finalized.
How High-Asset Divorces Differ
Regardless of the size of the estate, divorce negotiations have tax implications. Though most couples do not own multiple properties, high-value assets, or multiple investment accounts, high-net-worth individuals do.
High-net-worth is usually defined as estates with greater than $1 million in liquid assets, and the implications of divorce are far more complex in these situations. Dividing marital property and retirement accounts is a complicated process that creates numerous opportunities for the IRS to intervene.
High-net-worth couples can enlist the help of an accredited family law professional to prepare for the tax implications of their divorce, learning how to file taxes during and after the divorce, divide property, and calculate spousal support.
How to File Taxes During a Divorce
The couple’s marital status on December 31st determines how they should file their taxes for that period (e.g., jointly or individually). If the divorce has not been finalized by the end of the year, they may file jointly. However, this also raises the question of how the tax refund will factor into their divorce settlement the following year.
Couples with children must also consider their tax status during the year the divorce is finalized. While most couples receive tax benefits for filing jointly (e.g., a child tax credit), high-asset couples do not receive this credit.
However, the spouse with lower earnings may benefit from claiming the children on their taxes when they file individually post-divorce. For the primary earner, this tax advantage could be used to reduce post-divorce spousal and child support commitments.
Additionally, one spouse may make estimated tax payments while the divorce is pending, which should also factor into the settlement. Consider a case where both spouses have paychecks.
Still, only one must make estimated tax payments (e.g., if the individual is self-employed). If joint marital funds are used to pay one spouse’s estimated taxes, those funds may need to be reimbursed as part of the settlement.
A family law or tax professional can help with this. Options include preemptively setting aside a trust account for the refund to cover mutual divorce expenses. Alternatively, depending on the situation, the refund could be allocated to one spouse as part of their settlement.
Property Division During High-Asset Divorces
Real estate ownership creates financial obligations during a divorce, including tax consequences. When a marital home or other properties must be divided during the negotiations, couples should consider capital gains and property taxes in their decisions.
For example, the value of a marital home includes not only its market value but also the projected cost of its capital gains taxes if the spouse chooses to sell it. In high-asset cases, this can result in financial inequity if only one spouse is responsible for paying taxes on the sale.
Additionally, retaining ownership of the home also presents tax implications in the form of annual property taxes. If not properly managed, these taxes can cause the spouse to lose the home to the bank, especially if they were not the primary wage earner or if their finances change post-divorce.
Accounting for how capital gains and property taxes could impact long-term ownership is fundamental to creating an equitable settlement during a high-asset divorce.
Spousal Support Post-Divorce
Spousal support or alimony also has tax implications. Under the Tax Cuts and Jobs Act, the receiving spouse must now treat spousal support as taxable income, while the paying spouse can deduct payments from their tax returns.
There are exceptions to what is included in this area of support, including child support, noncash property settlements, whether in a lump-sum or installments, and payments that are your spouse’s part of community property income, payments to keep up the payer’s property, use of the payer’s property, or voluntary payments.
This is one reason couples in many high-asset divorces take advantage of child tax credits. If the receiving spouse can claim the children on a lower income, they may receive tax credits that offset the primary wage earner’s obligation to pay child support.
Speak with an attorney experienced in high-asset divorce to learn more about claim exemptions post-divorce.
Contact a Family Law Professional to Negotiate a High-Asset Divorce Settlement
While divorce can be complex in any income bracket, divorces are even more complicated for high-asset couples. The tax implications of asset division, property sales, property ownership, child custody, and more can be too much for most couples to negotiate independently.
Contact the experienced team at Milstein Siegel to understand the tax implications of your high-asset divorce, including how to best advocate for the best interest of you and your children during this process.
