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Divorce Tax Tips #1: Ensuring a Less Costly Divorce

August 18th

In many cases, divorcing litigants fight over their mutual wealth and belongings, and the parties fail to consider the impact of tax on their settlements. By failing to factor in the tax expenditure many settlements end up costing far more than anticipated.

Through the careful consideration of these issues, divorcing couples can save money not only on their tax returns, but on the cost of the divorce as a whole.

Two Assets of Similar Value May Not be Considered Equal Under Tax Law

Often, under tax law, items of similar value may be treated very differently. For example, capital gains will be taxed very differently from many other kinds of property. Capital gains taxes are calculated based on the profit reaped from the sale of the asset. The gain is therefore the difference between the sale price and the asset’s original cost.

Though the asset may at the time of divorce be valued equally to other kinds of property in question, its capital gain may be higher. Be aware, in the case of stock portfolios, there is a tax on the capital gain of each individual stock. With residences, the homeowner is permitted to exempt $250,000 from capital gains from the sale of their principal residence, assuming they lived in the home for two of the preceding five years.

Time Your Divorce to Ensure the Best Filing Status

The filing status on your tax returns is determined by your marital status on the last day of the filing period. For most people, this date is December 31. Consider this date when looking to finalize your divorce.

In some instances, you may benefit from filing a joint tax return. For example, the exemption limit on capital gains from the sale of a home is $500,000 instead of $250,000. In this case, it could be beneficial to delay finalizing the divorce if the filing were to occur at the end of the tax year.


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