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Evaluating the Tax Implications of Your Divorce

What are the tax implications of your divorce and how can you maximize net income after taxes?  Many San Diego divorces involve significant assets such as ownership of a closely-held business or professional practice, retirement assets such as a 401(k) or IRA, equity in the family home and other real estate and investment accounts.  California’s community property law requires a fair and equitable division of community property roughly equivalent to a 50%/50% split.  However, the tax implications of your divorce may be more significant than you imagine.  You should consider every tax angle before agreeing to a final divorce settlement.

For example, spousal support is taxed to the recipient and tax deductible to the payor.  Child support is neither taxable to the recipient or deductible for the payor.  Many are not aware of “family support” which combines child support and spousal support into a single payment that is taxable to the recipient and deductible for the payor.  It may actually be possible to “net” more money as the recipient of family support as the payor receives a tax benefit.  The value of the tax deduction is higher than the actual amount of the tax to the recipient in many cases and this allows for the payor to agree to a higher amount, netting more income for the recipient (than if the two were characterized separately) while lowering the post-tax cost to the payor.

Another taxable issue relates to the division of investments.  One should be cautious regarding the division of specific stocks.  Lets say the couple own $100k worth of stock in company “A” and $100k worth of stock in company “B.”  While both appear to be worth $100k the company “A” stock may have been purchased for $20,000 while the company “b” stock may have been purchased for $75,000.  The “basis” in each group of stocks would result in a much higher tax burden resulting from the sale of company “A” stock versus company “B” stock.

It is important to note that asset transfers between a couple are not taxable during the divorce, and in many cases for period of up to one year once the divorce is final.  It may be advantageous to both parties to give more than a 50%/50% split of the community property to one party while reducing the support payments of the other.  The tax attorneys and accounting staff at Allen Barron are prepared to help you evaluate the tax implications of your divorce allowing you to make the most informed and financially profitable decision.  If you are involved in a San Diego divorce and are concerned about the tax implications of your divorce we invite you to call 866-631-3470 for a free consultation.