Major life events often come with a large price tag. Weddings are often costly, homes are a big purchase, raising children is expensive and getting an education has a high price tag. Much like these positive life events can be expensive, so can some difficult life events. Divorce is not only emotional, time consuming and challenging to navigate, but it can also cost divorcing couples in Georgia and elsewhere a lot of money. Nonetheless, it is possible to reduce the financial burdens by a divorce by considering certain factors, such as tax consequences.
Getting a tax-conscious divorce
When a couple decides to divorce, they are faced with legal fees, time associated with the process and the emotional toll associated with needing to address difficult divorce issues. Thus, it is likely the divorcing spouses will want to reduce or prevent the impact the process will have on them. Being aware of the ways a divorce could have tax implications is essential.
Generally, the process does not cause tax consequences; however, if assets are repositioned to generate cash flow, this could cause tax consequences. Thus, it is vital that one considers ways they could avoid certain mistakes that could result in tax consequences during dissolution.
Three mistakes to avoid
First, one should not just focus on the value of the assets they are dividing. It is important to also consider the cash implications that could occur now and in the future because of the division of assets. Certain assets could have hidden implications.. For example, if a couple has both a traditional IRA and a Roth IRA with the same balance, the couple decided to split them, looking at them as being equal. However, they are not equal because a traditional IRA contains money that has never been taxed; thus, it is hiding a lot of unpaid taxes under its surface.
Second, if children are involved, consider who gets the dependency exemption. This is typically the custodial parent. Claiming dependency exemption could hold the key to other child-related tax benefits. This can include child-tax credit, childcare credit, earned income credit, educational credit and earned income credit. Because the exception is scheduled to come back in 2026, it I important that this valuable parental right
Finally, consider any tax benefits form the marriage. If a tax refund is coming, it may be possible to put this on the negation table and use it during a settlement.
During a divorce, there are many things to consider. It is vital to gain a full picture of the process, what rights you have and how best to protect them throughout the process.