Tax Tip of the Week
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Avoid this divorce trap
For the week of
July 23, 2001
Dividing marital property when couples divorce can be a tedious and difficult process.
In many cases splitting the assets 50-50 may appear to be a fair distribution, but not all assets are created equal
under the tax law. For example, some assets are tax-free, some are tax-advantaged, and some are taxed at ordinary
income rates. Failure to consider a property's tax consequences could result in one spouse getting fewer assets
than the other. $ 50,000
600,000
50,000
700,000
$ 1,400,000
Example.
When they divorce, Bob and Mary own the following assets:
Bob receives the cash, stock, and IRA in the divorce settlement. These assets are worth $700,000. Mary receives
the family home worth $700,000. Initially, it appears to be a 50-50 split. But look at what each spouse ends up
with, after taxes.
Cash
Stocks
Bob's IRA account
Family home
Total
The house has appreciated $250,000 since the couple bought it. Because she has owned and occupied the home for
two out of the five years prior to selling it, Mary qualifies to exclude the entire $250,000 gain from her income.
She ends up with $700,000, after taxes.
The stock has appreciated $500,000 since the couple bought it several years ago. When Bob sells the stock, he will
pay at least $100,000 (20%) in tax on the capital gain. In addition, the IRA will be taxed as ordinary income when
Bob withdraws the money. Assume Bob is in the 30% tax bracket. The tax bite from the IRA distribution will be $15,000.
Bob's after-tax distribution is only $585,000 compared to Mary's distribution of $700,000.
If you're considering a divorce, call us early in the process. We can work
with your attorney to help you make informed choices that take taxes into account.
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