Divorce is an emotionally challenging time. When high net worth people become involved, the complexities can extend beyond the emotional realm. One aspect that often gets overlooked is the impact of divorce on taxes.
Those with a high net worth should understand how high-asset divorce can affect one’s taxes.
Division of assets and alimony
During a high-asset divorce, the division of property and assets can have significant tax implications. It is important to understand that transferring assets between spouses may trigger tax liabilities. For example, selling stocks or real estate can result in capital gains taxes, while transferring retirement accounts may incur early withdrawal penalties and taxes.
Alimony, also known as spousal support or maintenance, is a common aspect of divorce settlements. It is necessary to note that the tax treatment of alimony payments has changed in recent years. The Internal Revenue Service states that prior to 2019, the paying spouse could deduct alimony payments, while the receiving spouse included them as taxable income. However, alimony payments made after 2018 are no longer tax-deductible for the payer, and recipients no longer include them as taxable income.
Property transfers and retirement accounts
Generally, transfers of property incident to divorce are tax-free, meaning they do not trigger immediate tax consequences. However, it is important to keep accurate records of the transfer to establish the cost basis when selling the property in the future, as this can impact capital gains taxes. Also, dividing retirement accounts requires careful consideration. Early withdrawals from retirement accounts generally incur taxes and penalties. However, through a qualified domestic relations order, spouses can transfer retirement assets without immediate tax consequences.
High asset divorces can have far-reaching repercussions, and taxes are an integral part of the equation. By staying informed and proactive, those going through a high-asset divorce can navigate the tax landscape with greater confidence.