There seem to be a few things in life you can just never escape. Death and taxes. Even when divorcing, you have to look at the value of your assets through the eyes of the IRS. This is important because in many divorce cases, assets are liquidated to satisfy the terms of property distribution. But, there could be tax implications depending on what you liquidate and how your assets are valued.
For example, liquidating a 401(k) or other retirement account to pay your spouse their part of property division could have immediate tax implications. For example:
- Early withdrawal of funds from a 401(k) often carries an additional 10% tax penalty.
- The funds you receive from the distribution are considered income and must be reported as such when you file your income tax return.
Depending on the type of account you liquidate, there may be exceptions to payment of penalties. And, if you have to report the payment as income, you might also be able to classify it as spousal support if that was its purpose. But, these rules are tricky and only a qualified legal professional should make the determination as to how your assets are classified. Likewise, the Court may look at your assets differently than you do, and place a value on things that is not dollar for dollar. This is so because division of property in the divorce world is equitable, which does not necessarily compute to a straight 50/50 split. To avoid penalty and a negative impact on your tax status after divorce, be sure to use a competent family law attorney when negotiating property division. Our staff is well trained and has experience making sure your rights are protected and the tax impact you feel is minimized.
If you have questions about how divorce affects your tax status, call our office for more information. Schedule an appointment with a skilled family law attorney in Stuart and the Treasure Coast to make sure your case is handled properly.