Everyone knows divorce is complicated. However, this is particularly true for high-net-worth couples. If you fit into this category and are considering divorce, it is imperative that you are proactive. Take the necessary steps to protect your legal rights and financial interests. Here’s what you need to know about the tax implications of a high net worth divorce.
Update Filing Status
First, a divorce is likely to change your filing status. Since you and your former partner will no longer be filing a joint return. It is important that you understand the implications of this change and how you should adjust your withholdings.
Liquidating Valuable Assets
Often, couples in a high net worth divorce case end up liquidating property and assets. However, you must be careful with this option. Liquidating assets could trigger a capital gains tax liability. Sometimes there are other options that will limit the impact of capital gains taxes, so we highly recommend that you speak to a financial planner before taking action.
High Net Worth Divorce and Child Tax Credits
If you have children with your spouse, then you will need to decide who gets to take the child tax credits and any other child-related tax exemptions moving forward. The IRS says that a child can only be claimed by one taxpayer in a given year.
Typically, the parent with primary physical custody has the first right to claim a child as a dependent. However, your attorney and financial advisors might work out a different arrangement where the higher-income parent claims the children. This may produce additional tax savings in some cases.
Dividing Retirement Accounts and Benefits
If you own a tax-advantaged retirement savings account like a 401(k) or IRA, you need to be careful when dividing retirement account proceeds. The last thing you want is to get hit with an early withdrawal penalty. A high net worth divorce financial advisor can help you understand the implications and how you can protect your nest egg. For example, a qualified domestic relations order permits you to divide the retirement holdings without incurring tax penalties.
Taxation of Alimony/Spousal Support
This is often a big issue in high net worth divorce cases. While negotiating a divorce settlement, it is important to consider the tax impact spousal support will have. The Tax Cuts and Jobs Act changed the way spousal support is taxed. Now, payments are not tax-deductible for the payor, nor are they reportable income for the receiver.
Resources for Divorce
We have lots of resources on our website for individuals considering divorce, in the process of divorce or post-divorce. Also consider attending one of our Second Saturday or Done with Divorce seminars.
Understanding the Tax Implications of a High Net Worth Divorce
If you are considering a divorce, it is very important that you understand the tax implications. Speaking to a financial advisor can ensure that you protect your financial interests and plan accordingly. To learn more about how a high-net-worth divorce will impact your taxes, contact Argent Bridge Advisors today.
