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The Tax Consequences of a High Asset Divorce

Getting a divorce can be a highly stressful and emotionally taxing process. Apart from having to come to terms with a failed marriage, you also have to deal with the tax issues stemming from the divorce – especially if you and your spouse happen to own a substantial amount of assets.

Division of Assets in a Virginia Divorce Case

In Virginia, marital assets are divided based on the doctrine of equitable distribution, which means the assets are to be divided in a fair and equitable manner – not necessarily equally. Depending on various factors, you or your spouse could get the larger share of the property. These factors include:

  • Earning capacity of both spouses.
  • Contributions (monetary as well as non-monetary) made by both spouses towards the acquisition and upkeep of marital property.
  • Debts and liabilities of both spouses.
  • Length of the marriage.
  • Factors that led to the divorce (whether one of the spouses was at fault).

It should be noted that the term ‘marital property’ refers only to those assets which were:

  • Acquired after the marriage.
  • Acquired by either of the spouses before the marriage but increased significantly in value after the marriage due to the contributions made by either or both of the spouses.

The different types of marital property that may end up being divided in the event of a divorce include:

  • Residential properties
  • Vacation homes
  • Bank accounts
  • Retirement accounts
  • Stock market investments
  • Life insurance policies
  • Automobiles
  • Jewelry
  • Businesses
  • Trusts
  • Artwork
  • Collectibles
  • Furniture
  • Intellectual property

Tax Issues to Consider in a High Asset Divorce

Filing Status

One of the immediate consequences of a divorce is that you will no longer be able to file taxes jointly. This means that you will have a different tax filing status – most likely either single or head of household – which will have various tax implications.

Capital Gains Taxes

Some of the marital property you own – real estate property and stock investments in particular – might have to be liquidated and distributed equitably between you and your spouse. If the assets in question have increased in value since you or your spouse acquired them, you may have to pay capital gains taxes on the proceeds.

If, on the other hand, the assets in question have considerably depreciated in value, you will be selling them at a loss. In such a scenario, you and your spouse might be able to deduct the losses from your taxable income. You can discuss it with your spouse, consult your lawyer, and talk to a CPA if needed and decide who gets to deduct the losses from their income.

Retirement Accounts

In Virginia, retirement accounts are generally considered marital property – even if the accounts in question were opened before the marriage. However, the court will take the date on which the account was created and the date of your marriage into consideration while dividing the retirement funds.

Let us assume that you opened a retirement account five years before your marriage, made regular contributions throughout the course of your marriage, which lasted 20 years, and have now filed for a divorce.

In such a scenario, the court might decide to exempt the contributions made to the account prior to the marriage while dividing the funds. In that case, it would only divide the contributions that were made during the 20 years you were married to your spouse.

One of the problems associated with the division of retirement accounts is that you might have to pay early withdrawal penalties. In order to avoid these penalties, some types of retirement accounts require that you obtain a qualified domestic relations order (QDRO).

Child Tax Credits

The IRS states that only one spouse can claim child tax credits in a given year. So, if your spouse gets custody of your children, you will probably not be able to claim child tax credits anymore.

Spousal Support

Until 2018, spousal support payments were tax-deductible. This is no longer the case, which means you cannot deduct the payments from your taxable income – if you are the payer. On the other hand, if you are the recipient, the payments you receive are exempt from taxes, which can be an advantage.

Planning to File for Divorce? Choose the Right Divorce Lawyer to Represent You

At Olmstead and Olmstead, we know that high asset divorces can be extremely complicated. We will be with you at every step of the process –valuation and division of marital assets, allocation of debts, spousal support, child custody, and child support. We will work hard to achieve a positive outcome in your divorce case and to protect your long-term interests. Call us today at 703-361-1555 for a free consultation with one of our Virginia divorce attorneys