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Avoiding tax entanglements in divorce

| Mar 22, 2021 | family law |

When it comes to property division during a divorce in Maryland, being able to accept what is fair and balanced can be challenging. Clear-cut financial details concerning taxes in particular can get overlooked during divorce proceeding, and this may cause problems down the road.

For residents of Glen Burnie and Ocean Park going through divorce, it can be advantageous to find skilled family law attorneys whose experience can resolve even the most complex cases.

Equitable property division

Maryland is an equitable division state, meaning that the court’s decision on the distribution of marital property will be fair, but not necessarily equal. Factors that a judge will take into account include contributions each spouse has made to the marriage, their financial circumstances and ages, the length of marriage and grounds for divorce.

Unequal asset division

During property evaluation, everything acquired during marriage is given a monetary value, whether it is the house or car, cash accounts, stocks, bonds or business interests. Some of these have tax implications with serious consequences if they are overlooked.

The actual cash value of two assets may not be equal when factoring in their surrender or withdraw value. For example, a traditional IRA has funds that have never been taxed. When those funds are withdrawn, the taxes can end up being up to 35%, meaning that this asset has a surrender value of a third less than the face value. The Roth account, on the other hand, does not have such tax issues.

By that same token, two holding of the same stock that are valued equally may have a different capital gains tax imposed when they are sold, based on the appreciation of the stock at the time of sale.

Paying attention to tax credits and liabilities

Accounting for tax liabilities or credits at the time the marital property is evaluated can help even the playing field in the divorce settlement. Knowing that you have a tax refund coming because of an underperforming business or stock losses will help offset current or future taxable income.

The IRS may go after each ex-spouse after divorce if they have been filing joint tax returns and owe taxes. It’s better to file as married filing separately or draw up an indemnification agreement for protection.

There may be other tax benefits for the custodial parent, including childcare, earned income and child-tax credits if their income falls within the qualifying bracket.

 

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