Taxes are an unavoidable part of life, but it is possible to minimize their consequences on your future finances. However, taxes might be one of the last things on your mind when going through a divorce. While it is understandable that you might feel preoccupied with other aspects of the process, you should not underestimate how easy it is to skew what should be an equitable distribution of your marital assets.
You do not need to consider taxes for every last asset you deal with during property division. For example, you are unlikely to encounter tax problems with your household furniture or kitchenware. Instead, you should focus your attention on large, valuable assets like retirement accounts and stock holdings. If you have kids, you might also want to pay attention to possible tax benefits associated with various custody arrangements.
Will your retirement be taxable?
Preparing for the future is important, so maybe you and your spouse both chose to contribute to your own work-sponsored retirement accounts. Perhaps one of those accounts is a Roth IRA and the other is a traditional IRA. Absent a prenuptial agreement, both of these accounts are most likely marital assets.
Should those two accounts have similar balances, you may choose to keep one account while your spouse keeps the other. This may seem like a smart decision, but it completely overlooks the associated taxes. The money in your Roth IRA account has already had taxes removed from it, so the balance reflects its actual value. Whoever keeps the traditional IRA could have to pay up to 35% in taxes.
How much did you pay for that stock?
Investing is an excellent way to create passive income. If you purchased a stock holding that performed well and grew in value over time, you may have decided to purchase a second holding. If the stock holdings have equal value of $100,000, you might again think that it would be easiest to keep one holding while your spouse takes the other.
This decision overlooks an important factor when it comes time to sell — how much you paid for those holdings. If you purchased one of those holdings for $45,000, it will be subject to a 20% capital gains tax. When you go to sell, you will only get $89,000. If you purchased the other holding for $90,000, you would only pay around $2,000 in taxes and get to keep $98,000.
What about child tax credits?
Before 2018, parents could expect to see a reduction in their taxable income, claiming a dependency exemption. A new tax law introduced in 2018 essentially zeroed out that exemption until 2025, when it will return. If you have a child who will still be a minor in 2025, consider going ahead and addressing which parent will claim him or her as a dependent. This is largely up to your custody arrangement, and primary custodians usually get to claim the dependency exemption. Parents in shared custody arrangements often alternate years.
Your divorce does not have to compromise your financial security. However, navigating Maryland family law on your own can be a difficult experience, putting you at risk for losing money. Do not leave your finances at risk like this. Instead, seek out the guidance of an experienced attorney who can uphold your rights throughout this process.