Watch Out For Taxes During Divorce

On behalf of The Berger Firm Dec. 23, 2020

Finances often top people’s lists of concerns when divorcing, and for good reason. Decisions made during divorce can have a significant impact on one’s financial future. Property division requires careful attention to detail, including not just the face value of an asset, but also how taxes might affect its value in the future.

How Kentucky couples approach dividing retirement accounts is a good example of this. The first approach would be for one spouse to simply withdraw a portion of the funds to give to the other. However, this comes with a 20% tax withholding, meaning that the recipient would actually get less than planned. The second approach is to get a qualified domestic relations order. A QDRO allows divorcing couples to transfer funds from one 401(k) account to another without incurring any penalties or taxes.

Another problem is assuming that two assets are worth the same without taking taxes into account. For example, $10,000 in a bank account is not the same as a stock that is valued at $10,000. Although the two have the same face value, whichever spouse keeps the stock might have to pay capital gains tax. Depending on how much he or she sells the stock, it could end up being worth much more or less than the original $10,000.

It might not be easy to predict when and where taxes will come into play, making property division a tricky process to navigate. Approaching every decision by one’s self is not the only way to go about things, though. Some people in Kentucky choose to seek guidance from experienced attorneys before heading into divorce.