Introduction To Taxes
Should you consult a tax specialist? Your attorney knows whether any special tax consequences need to be evaluated at this stage. No taxes are due on a straightforward, equal division of marital community property. However, the way you or the judge makes an overall equal or equitable division may create unequal future tax liabilities. Have a preliminary opinion from a tax specialist on every problem area before you talk settlement or begin final preparation for trial.
It may help at this early stage to read two pamphlets the Internal Revenue Service offers. The first is Publication 504, Tax Information for Divorced or Separated Individuals. If you live in a community property state, the second, Publication 555, Community Property and Federal Income Tax, should help you understand the concepts you’re dealing with.
For the tax consequences associated with the family home, please refer to § 7.07 Introduction To The Family Home, above.
Taxes can also be triggered on transfers, not as a direct result of the divorce. Have you or your spouse funded a deferred compensation account in one of your names with contributions that belong to both of you? If you withdraw your one-half, arrange for direct payment to a new deferred compensation account in your name to avoid paying tax and a penalty on a premature withdrawal.
You’ll need to establish the purchase prices for appreciated assets. It’s an assignment that must be done if you want to know the true net value of the property you are dividing. Figure out the basis, usually cost, of investments that you aren’t going to divide in-kind, that is, literally each take half of each one. When eventually sold, tax will be due on the increase in value over the period they were held. For example, if you sell now a stock you just bought for one hundred dollars, that may be worth more to you than a stock worth one hundred twenty dollars you bought for forty-five dollars two years ago. Based on the current tax rates, the amount of the tax due on the seventy-five dollar gain on the one hundred dollar stock may result in a lower net value for most people than the one hundred dollar stock with no gain, and therefore no tax. With the frequent changes in the tax laws and tax rates, paying for tax advice is often a sound investment in itself.
Attorney’s, accountant’s and your tax preparer’s fees for tax advice are tax deductible. Your attorney should allocate the proper portion of his or her fees so you can claim this deduction. If your attorney is directly paying a tax advisor for assistance on your case, that should be broken out as well and identified.