The tax implications of a Mesa divorce are the same throughout the state of Arizona and largely throughout the whole country, because most tax consequences are governed by the IRS or the federal law. Divorce is a nontaxable event. That means getting divorced and transferring assets between spouses will not trigger someone’s requirement to pay taxes.
For instance, when the courts are splitting retirement accounts, people often think that taking money out of their retirement funds before they’re of retirement age will trigger a 10 percent penalty and taxes on that withdrawal. That is not true when you’re getting divorced.
You can get divorced and divide your retirement accounts without anyone having to pay tax, and that’s true not just for retirement accounts but for every asset. The important thing to note is that the basis of the asset transfers to the spouse who keeps the property.
Tax Consequences of Asset Division
If you make profit on the sale of a primary residence, a portion of that would be tax-free. If the primary residence goes to one spouse, the taxes for the home would not be divided between the two parties. Whoever takes the asset at the end of a Mesa divorce takes the tax consequences that come with it.
Alternatively, if you have two homes, a marital home and a rental property for example, the gains on the latter asset would be taxable. So, if you buy a rental property for $200,000 and you want to sell it later for $300,000, $100,000 of gains will be subject to tax. If you are awarded that piece of property at the end of a Mesa divorce, it will come with tax complications.
When you’re doing an equitable division and figuring out the value of your marital community, your lawyer should determine the value of the property after tax. Some money – for instance, a Roth IRA – is worth exactly its face value because you’ve already paid tax on it, so when you get it back, you’ll get it back tax-free.
You will pay tax on a traditional IRA or a 401K, so it is worth whatever your tax bracket is or will be at the time that you get divorced minus the money in the account. For instance, if you’re getting $2,000 per month from your 401K, and you pay tax on that at 25 percent, then you’re looking at $1,500 that’s actually awarded to you each month as opposed to a Roth IRA giving you $2,000 per month.
Taking Advantage of a Nontaxable Event
Your divorce attorneys are not tax experts. It is in your best interests to speak to a tax expert because there are a lot of things that you can do to take advantage of the fact that divorce is a nontaxable event.
For example, many people take money out of retirement and use it to pay off debts. This is a good way to get around the early withdrawal penalties that you would otherwise have if you used retirement funds to pay off debt.
As long as it’s part of your divorce, you will not be taxed on the withdrawals. This can make a substantial difference, especially if you are a high net worth couple or have a complicated financial situation.
If you own a business in Mesa, there may be tax consequences associated with getting divorced. If the business has any outstanding tax liability, the person who takes the business assumes the tax liability.
When a couple owes a tax debt to the IRS, they may attempt to allocate it to one party or the other party. The IRS doesn’t care what you’ve come up with in your divorce; the IRS is going to come after both of you to pay that debt. Keep in mind that your agreement is not binding on the IRS or any third party.
Ask an Attorney about the Tax Implications of a Mesa Divorce
Whatever types of tax implications are related to each individual item of property stay connected to the property. Even though nothing happens upon the divorce, when the property is transferred, whatever tax consequences come with that asset are also transferred.
When you are coming up with a list of what property you have and how you want it to be divided, you might want to add an additional column to your spreadsheet that says, “What is the after-tax value?” This way, you can look at the value as a whole after tax when you’re negotiating on how to divide your assets.
The tax implications of a Mesa divorce can have an enormous effect on equitable distribution, so make sure you take the time to talk to an experienced attorney and think about these things when you’re going through divorce. Call our team for more details.