There are so many things to worry about when your marriage falls apart. The depression and anxiety make it difficult to concentrate. It is strenuous enough to think about the obvious items of dividing time-sharing with the children and who gets what property. Beyond the basics, there are some relatively hidden issues that linger and one such area has to do with your tax obligations.
An obvious issue to think about is who will be allowed to take the dependency exemption for the children. This is pretty obvious and should be described in the settlement agreement or the order signed by the court.
The first hidden issue arises as you decide which of you is going to receive what portion of any brokerage accounts. In dividing stocks and bonds, you must be aware of the tax basis for each asset so that there are not any unevenly divided tax obligations. For example, suppose you own 200 shares of Apple stock. Perhaps half of the shares were purchased recently for $100 per share while the other half were purchased a long time ago at $50 per share. When dividing the stock, you will want to ask the broker to separate the brokerage account so that the records show each of you getting half of the recently-purchased stock and each of you getting half of the older shares as well. By doing that, you will both have the same capital gains tax obligation assigned to the Apple stock. In dividing an IRA or a 401K, merely advise the broker to conduct the same procedure to dividing shares of each asset in the account.
There is another significant tax issue related to retirement accounts. If you are dividing an IRA, you must be careful not to withdraw half the money into your personal account and write a check to your spouse so that your spouse can then place it into the spouse's IRA. That would cause you to have to pay income tax on the withdrawn amount. To avoid that, merely ask your broker to transfer the assets directly from your IRA into your spouse's IRA. Your broker shouldn't have a problem doing that either.
If there is a non-IRA retirement account, such as a 401K or 503B, the tax law allows you to do the same thing. With those types of accounts, you will be required, however, to have a court document in order to accomplish it. It is called a Qualified Domestic Relations Order or QDRO (pronounced quadro). This is merely an order signed by the judge in your divorce case that describes what portion of the account is going from the employee-spouse to the other spouse. It creates the one exception to the previous IRS rule that funds could only leave those accounts by being paid to the employee.
In some states, there are also laws relating to portability of the homestead exemption on your home. If you are in one of those states and you are going to sell the marital home and divide that money along with everything else, you have to determine who will get to take advantage of this tax provision. In many instances, you may place a provision in your divorce settlement agreement that you are equally dividing that benefit. Ask your lawyer about that concept if you are selling the marital home.
It is bad enough that we have to deal with tax issues in an intact marriage. When divorce raises its ugly head, you have to spend even more time thinking about taxes. As boring as tax issues are, it is worth staying awake in order to save the money that would otherwise go to the government.
Stann Givens has been practicing law in Florida for 41 years and is the founding partner of Givens Givens Sparks. He has been Board Certified by the Florida Bar as a Marital and Family Lawyer since 1991, on the list of "Best Lawyers in America" since 1998, and been named a "Super Lawyer" since 2006.