Tax Implications of Dividing Assets in Alpharetta

Many things must be divided in a divorce, including real estate, shares in a family business, titles to vehicles, personal property, savings or retirement accounts, tax credits and liability, and let’s not forget the children. In a divorce when the two spouses sign a final decree or the court orders a Settlement Agreement dictating the terms of their separation, the spouse who is awarded physical custody of children retains the marital home or other real estate, or receives title to certain personal property or the family business will also receive specific tax breaks or liabilities that go with those items. To learn more about the tax implications of dividing assets in Alpharetta, it is best to consult with a knowledgeable attorney from our team.

Filing Taxes Jointly or Separately

If a couple in the process of divorcing is still married on the last day of a tax year, they have the option of filing their federal tax return as married filing jointly or as married filing separately. The former tax status entitles the couple to additional tax benefits, such as the largest standard deduction, more generous tax brackets, and no dispute as to who claims the children that year as dependents.

For a sole working spouse, the double standard deduction can reduce taxable income significantly. On the other hand, both spouses become jointly and separately liable for: the accurate reporting of all income and credits, as well as the entire tax liability including interest and penalties if these are assessed.

If you prefer to separate your finances immediately, then filing separately may be a better option. Filing separately can entitle the custodial parent to file as head of household. This is an advantageous tax status which carries a higher standard deduction and the possibility of qualifying for additional tax credits. For the non-custodial parent, filing separately may result in higher taxes – but no shared liability with a spouse that can’t be trusted or is not cooperating on a joint return.

Spouses filing taxes separately – either before or following a divorce – can never claim the same child on both of their tax returns in any given year. The right to claim dependents normally goes to the parent with physical custody and must be waived by the custodial parent signing IRS Form 8332.

Certain deductions only exist if the divorce is not finalized before the end of the tax year. For instance, if one spouse contributed to the other spouse’s traditional IRA during the tax year, the contributing spouse can only deduct their contribution if the divorce is not yet finalized at the end of the tax year. Otherwise, the contribution stands and may be divided if it is designated marital property by the court, but the tax deduction for the IRA contribution will be lost.

Tax Breaks Associated with Certain Assets

All property distribution in Alpharetta follows the rule of equitable division of assets. This means that the court must determine that the two spouses receive an equitable share of the marital assets, when balanced against both parties’ separate property, their earning ability, and other factors. If one spouse is granted physical custody of the children, they may also receive title to the marital home and the larger vehicle in the settlement, while the other spouse may receive a larger share of the savings account or family business.

Parents awarded custody will benefit from the Head of Household tax status and various tax credits available only to those who are able to claim dependents on their tax returns. As of the 2017 Tax Cuts and Jobs Act, alimony ordered in divorces effective after January 1, 2018 is no longer tax-deductible to the payor nor taxable to the recipient. Child support, as always, remains a non-taxable event.

Increase in Property Value after Spousal Contributions

Whether separate property brought into the marriage, or marital property acquired with joint funds, if an asset’s appreciation is due to anything more than market forces during a marriage, that appreciation must be considered a marital asset. If the appreciation in value is a marital asset, then it is subject to equitable division by the Alpharetta divorce court, and both spouses will be responsible for the capital gains taxes on their proportion if and when they dispose of that asset.

Decrease in Property Value Due to One Spouse’s Action

In the same way that appreciation of an asset due to the efforts of one or both spouses becomes a marital asset, depreciation of an asset due to the efforts of one or both spouses is also considered marital property. In the case of depreciation, the loss would be divided equitably along with other property, and both spouses would be able to write off their proportion of the depreciation on their taxes. In the case of capital loss, the loss in value would be equitably divided upon disposing of the asset, and both spouses would include the capital loss on their taxes for the following tax year.

In either of these cases, if an Alpharetta divorce is not finalized prior to disposing of the asset or prior to the end of the tax year in which the appreciation or depreciation was realized, and the spouses elect to file a federal tax return under the status married filing jointly, then the entire capital gain or loss can be included on the joint return, either adding to or deducting from the couple’s joint income.