Facing a divorce is painful, at best. It’s can be heartrending, gut-wrenching, disruptive and even emotionally destructive. Divorce can produce depression and deep anxiety. Even when neither spouse is truly “at fault,” there can be lingering feelings of doubt and guilt. If all that weren’t enough, divorce can produce hidden tax issues as well. The following non-exclusive list of tax issues ought to be considered as a spouse moves through the process of dissolving a marriage.
Beginning with the year in which the divorce becomes final, the parties must, of course, change their filing status to reflect the fact that they are no longer married. Depending upon the respective income levels of the spouses, this may actually be positive for the lower-earning spouse. Dependency exemptions are a bit more complicated. If there are two children, does each former spouse get one exemption? Does the spouse that contributes most of the support for the children get two? This issue may have been negotiated during the dissolution process. If not, the issue can be problematic.
Generally, the spouses are concerned with an equitable division of brokerage accounts and other investments. Valuation issues are usually not too difficult; publically traded stock is valued every trading day. But the tax basis for each respective spouse can be much more difficult. For example, if the couple had 300 shares of Apple Corporation at the time of the divorce, valuation is straightforward. If 100 of the shares was purchased for $60 per share and 200 shares were purchased at $100 each, which spouse gets the lower basis stock? Is it also equitably split? This is an important issue to be determined before the divorce is finalized.
Somewhat similarly, the division of retirement accounts can be problematic. It is typically important to have the division made at the account level by the financial institution, rather than have the institution release funds to one spouse, with that spouse transferring assets to the other. If the transfer is accomplished by means of a Qualified Domestic Relations Order, the financial interests of both spouses can be considered and protected.
Generally speaking, a husband and wife can each exclude the first $250,000 of gain following the sale of their residence (the couple must have lived in the house for at least two of the five years prior to the sale). In a divorce situation, if the house is sold at the time of the divorce, the rule still applies. If, instead of a sale, there is a buyout by one or the other spouse, the selling spouse usually need not worry about any capital gain. The “buying” spouse, however, has other considerations. If the buying spouse stays in the house and later sells it to a third party, capital gains tax will apply to that sale. While the spouse may then exclude $250,000 of gain, he or she may not exclude the former spouse’s similar amount. Moreover, if the spouse continues to own the house, but does not live in it, he or she may not be able to take advantage of the $250,000 exclusion at the time of the sale.
Tax issues related to a divorce can be confusing and complex. They are important, however, as each spouse moves forward. If you and your spouse have significant property issues to consider, you owe it to yourself to get experienced, caring advice from a Texas attorney that understands the ins and outs of tax law.
The attorneys at Romano & Sumner have more than 20 years of combined experience providing expert legal assistance to clients in all types of straightforward and complex tax matters, including those related to the dissolution of a marriage. We provide tax planning, business planning, and wealth management advice. At Romano & Sumner, we pride ourselves not only on our professionalism, but upon our client service. We know that each situation is unique. We return phone calls within one business day. We keep clients informed. We complete the work within the allotted time frame. Call us at 281–242–0995 or complete our online contact form.
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