Divorce and Potential Tax Consequences
- posted: Nov. 03, 2021
- personal taxes
There is no getting around it: tax issues are always part of any divorce, simply because the marital assets are being divided, and the Internal Revenue Service (IRS) treats this as income. This is especially complex to navigate when the divorce involves high-income parties and high-value assets. The stakes are often higher when large marital estates have to be divided, and if it is not done in accordance with relevant tax law, the IRS can take a distressing amount in recompense.
Standard and Complex Questions
Even in an average divorce, there are multiple potential tax issues that might become apparent. Some of the most common include deciding who gets the exemptions if you have children, determining whether to file as joint/married or single (if your proceedings are happening during tax season), answering any residency-related questions, and so on. These may very well appear in high-value divorces as well, but because the value of the marital estate is that much higher, it is more common for wealthy couples to discuss such issues beforehand – for example, in a premarital agreement. If this is not done, it may be decided along with the more specific issues that appear.
There will be specific tax issues, in addition to the basics, that will disproportionately affect couples with higher incomes. Many couples with average marital estates will not have to contend with issues such as capital gains tax, estate tax, and other potential money sinks if not properly planned for, which is why it can matter to specifically seek an attorney with experience in divorces where multiple high-value assets must be divided.
Issues Specific to High Asset Divorces
The primary objective of most couples in any divorce – but especially in high asset divorces – is to have a fair tax burden for each spouse, to avoid traps or pitfalls that an unfamiliar attorney might not be aware of.
For example, one of the most common ways to avoid these tax pitfalls, for example, is to be extra aware – as well as have an attorney who is – of potential issues with titled assets. The IRS Form 1041, which is completed to provide an accounting of an estate or trust’s assets, holds that transfers between spouses in the event of a divorce are generally non-taxable. However, high-income couples are more likely to have their assets titled not in their own names, but in the names of living trusts, estates, or partnerships, such as real estate, and such transfers usually are taxable. An unaware attorney can cost their clients significantly.
Another situation that is vastly more common with high-income divorces is having to divide an extensive stock portfolio. Even if a couple has significant shares in one company, the shares purchased at different times will confer an unequal tax burden if apportioned inappropriately. Stock in Microsoft is a good example of this.
If a divorcing couple purchased shares of Microsoft during the 1980s at a low price, but then later purchased more shares in 2005 when the stock had already split several times, and one spouse is awarded the 1980s stock and the other the 2005 stock - the tax burden for the latter would be significantly larger, which is inequitable. Courts still must attempt to divide assets in the most equitable manner possible.
Contact an Experienced Attorney
If you are considering or have made the decision to divorce, call Kirshenbaum Law Associates at 401-467-5300 to schedule a confidential consultation with one of our skilled Rhode Island divorce attorneys. We will evaluate your case and help you decide the best way to proceed.