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Don’t overlook tax implications when dividing property

On Behalf of | Jan 25, 2021 | Firm News

In theory, property division should be relatively straightforward. You determine a value for your marital property and figure out the most equitable way to divide your assets. Of course, in practice, things are much more complicated.

One of the issues you’ll have to watch out for when dividing property is possible tax concerns. You don’t want to see the value of your share plummet when the IRS comes calling. Here are a couple of areas where taxes could become an issue.

Stock options

You should avoid taking some items at their face value. Shares of stock are one such item. $5,000 in cash and $5,000 in stocks are not the same thing. If you intend to sell stock to meet your goals of an equitable division, you could be hit with a capital gains tax. It’s important to subtract the expected tax penalty to reach a more accurate value of what you’re giving up.

Retirement accounts

401(k)s, and other retirement accounts can account for a substantial portion of one’s assets. Keep in mind, if you were married for 20 years, you would want to avoid simply withdrawing 10 years’ worth of contributions from your account and handing the proceeds over to your ex. Withdrawing from a retirement account before you’ve retired will result in a significant tax hit. The penalty is even greater for those under the age of 60.

One way to address the division of retirement accounts is to use a qualified domestic relations order (QDRO). This legal document will help you avoid the tax implications of dividing a 401(k) or another type of account. Another option is giving up something else to make up for the value of the retirement account. This will allow for an equitable division while keeping the funds you’re relying on for later in life intact. You should discuss all available options with a skilled professional when it comes to dividing assets.