Tax Considerations in Divorce: Navigating Financial Uncertainty

Why Tax Planning Is Crucial When Navigating Divorce

At Aligned Wealth Advisors, we understand that divorce can significantly disrupt your financial stability. You might be asking, "Why should I worry about taxes in the midst of everything else?" The answer is simple yet profound. Taxes, if not handled properly during a divorce, can result in unexpected financial burdens that could affect both parties for years to come. It's about protecting your financial future and ensuring a fair and equitable division of assets. Imagine stepping into your next chapter with financial clarity and confidence—this is why effective tax planning is indispensable.

How We Approach Asset Division and Tax Considerations

Dividing assets in a divorce isn't just about fairness—it's also about understanding the tax implications that can affect each asset's true value. At Aligned Wealth Advisors, we start by evaluating your shared assets: real estate, investment portfolios, and retirement accounts. How do we do this? By analyzing the tax implications associated with each asset, we help you make informed decisions that optimize your financial outcomes. For example, who keeps the house, or how retirement accounts are split, can have significant tax repercussions that need to be carefully considered.

Understanding Alimony and Its Tax Implications

The treatment of alimony in tax filings has seen significant changes recently. Before 2019, alimony payments were deductible for the payer, which often influenced higher-income earners to agree to larger alimony payments due to the tax break. Conversely, recipients had to report these payments as taxable income. However, under the new law, which applies to divorce agreements finalized after December 31, 2018, alimony payments are no longer deductible by the payer nor taxable to the recipient.

This change requires a new strategy in divorce negotiations, as the tax incentive to provide higher alimony has been removed, potentially leading to lower settlements for recipients. At Aligned Wealth Advisors, we explore various settlement scenarios under the new law, providing a clear picture of the financial impacts. This strategic insight allows our clients to negotiate from a position of strength and make well-informed decisions that serve their long-term financial interests.

Choosing the Best Tax Filing Status During Transition

When undergoing a divorce, choosing the right tax filing status is pivotal and can significantly affect your financial health. The options—filing jointly, separately, or as head of household—each have distinct advantages and drawbacks depending on your specific situation. Filing jointly may yield lower taxes but requires cooperation between separating spouses. Filing separately might increase tax rates but offers individual control over the tax return.

For those who qualify, filing as head of household can provide greater tax savings and higher deductions. At Aligned Wealth Advisors, we carefully evaluate your personal circumstances, including income levels, dependents, and potential deductions to recommend the most advantageous filing status. Our expertise ensures that you navigate this transitional period with the best possible tax strategy, minimizing liabilities and maximizing potential refunds or reductions in tax obligations.

Strategizing the Sale of Jointly Owned Properties

The decision to sell jointly owned property during a divorce is layered with financial complexities, particularly regarding capital gains tax. If the property has appreciated, the capital gains tax could significantly reduce the net proceeds from the sale. The timing of the sale can also impact your tax liabilities; selling while still married and filing jointly may offer a larger exclusion ($500,000 for married couples) compared to selling as a single individual ($250,000 exclusion).

At Aligned Wealth Advisors, we analyze the tax implications of selling your real estate at different times to find the most financially beneficial approach. This careful planning helps align the sale with your immediate cash needs and long-term financial goals, ensuring that you both maximize your financial returns and minimize tax liabilities.

Splitting Retirement Accounts Without Triggering Taxes

Divorce proceedings often involve the division of retirement accounts, which if not handled correctly, can lead to significant tax penalties and financial loss. Tools like the Qualified Domestic Relations Order (QDRO) are essential for splitting retirement assets such as pensions and 401(k)s without incurring early withdrawal penalties or unwanted tax consequences.

At Aligned Wealth Advisors, we manage the process of setting up QDROs and other necessary legal instruments, ensuring that both parties retain their fair share of retirement assets while avoiding unnecessary financial strain. This meticulous approach protects your retirement funds and ensures they continue to contribute to your financial security.

Addressing Tax Implications for Child Support

Child support, unlike alimony, does not directly affect your taxable income since it is neither deductible by the payer nor taxable to the recipient. However, the tax implications of who claims the dependency exemption for the children remain significant. This can affect eligibility for child-related tax benefits such as the Child Tax Credit and the Earned Income Tax Credit. At Aligned Wealth Advisors, we consider all aspects of your post-divorce tax scenario, including the best arrangement for claiming dependents. Our strategic advice is designed to maximize your tax benefits and ensure your financial stability, helping you navigate the complexities of post-divorce finances effectively. Through careful planning and strategic negotiations, we ensure that child support arrangements serve the best interests of both the children and the parents financially.

Commitment to Ongoing Support and Periodic Reviews

Divorce marks a new beginning, and your financial strategy should evolve with your changing life. At Aligned Wealth Advisors, we commit to an ongoing partnership with our clients. Through periodic reviews, we ensure that your financial strategies adapt to your new circumstances and any changes in tax laws. This ongoing support is designed to maintain and enhance your financial security, giving you peace of mind as you move forward.

Navigating the financial uncertainties of divorce can be daunting, especially when it comes to taxes. However, with the right guidance and a proactive approach, you can manage these challenges effectively. At Aligned Wealth Advisors, we are dedicated to providing you with the expertise and support needed to navigate the complexities of divorce taxation. By focusing on comprehensive tax planning and strategic financial reviews, we help ensure that you transition into your new life phase with financial clarity and security.

Andrea Ward, CPA

Andrea has worked in the finance industry for nearly all of her professional life. Taking over the family business she continues to combine her tax and investment knowledge to leverage the investment power of money while reducing gains taxes paid to the IRS. She lives in the Fort Worth, Texas area, (although is happy to work with virtual clients all over the United States!) Andrea loves to travel and dabble in home decorating.

Matt Ward

Matt began helping clients in the insurance industry. However, he struggled with big business’s emphasis on selling rather than helping, so he came to work with the family business focusing on investment advisory. In his free time, he shreds the gnar on his snowboard and jams on drums and guitar (but not at the same time).