Tax Considerations in Divorce
Taxes and a Divorce in NJ
When your marriage is crumbling and you're headed for a divorce in NJ, the tax implications may be the last thing on your mind. But with tax time looming on the horizon, taxes are something you should give serious thought to. They have the potential to make or break settlement negotiations and they can seriously affect the bottom line of your post-divorce finances.
Capital Gains and Property Division in a NJ Divorce
First, the good news: if you get the house or half the stock portfolio in the divorce, it's not a taxable event, at least not at the time it happens. You may get hit with a significant capital gains tax somewhere down the road, however, if you eventually decide to sell. Your tax basis in an asset is not what it's worth at the time of your divorce, but at the time you and your spouse originally acquired it.
Here's how this works. You get the house, currently worth $400,000. You and your spouse paid $150,000 for it many years ago, and now it's all yours. You inherit that tax existing tax basis in the property -- $150,000 -- when you take ownership, so if you decide to sell the house for $400,000, you have a $250,000 capital gain. The Internal Revenue Code offers a $250,000 exclusion from capital gains tax for the sale of a home, however. Multiple rules apply, such as that you must use the home as your primary resident for two out of the five preceding years before the sale, but if you qualify for the exclusion, you would not owe capital gains.
Now let's say that you realize a $250,000 capital gain from the sale of your half of the stock portfolio. The IRC doesn't offer an exclusion for this type of asset, so you would owe a capital gains tax of $59,500 -- 23.8 percent if you sold the property in 2015. So the stock portfolio you took in the divorce is actually worth only $190,500.
The moral of the story is that when you're taking property in a NJ divorce, not all assets are created equal. The house is worth a lot more to you than the stock, even if they seem of equal value at first glance. This should be an important consideration in your settlement negotiations.
Alimony Is Tax Deductible
If you end up with an alimony obligation, there's a small silver lining -- your spouse has to pay taxes on this income, not you. You can take an above-the-line deduction for the amount you pay him or her on the first page of your tax return, reducing your adjusted gross income by this amount. Payee, in turn, must claim the amount as income and add it to any other earnings she has. The Internal Revenue Service has myriad rules for this. Your New Jersey divorce judgment must specifically state that the payments are alimony -- not child support, which is not tax deductible, or a payment associated with property settlement.
If you're on the receiving end of an alimony obligation, take a moment to consider how much you're actually receiving after the IRS takes a bit. If you receive $12,000 a year in taxable alimony and this bumps you into a 25 percent tax bracket, you're actually only receiving $9,000 a year in spousal support. If you're negotiating for alimony, take a moment to consider how it will affect your tax bracket and your overall tax liability.
Who Claims the Kids?
Claiming your children as dependents reduces your taxable income by $4,000 each in the 2015 tax year, increasing to $4,050 in 2016. The IRS takes the default position that the custodial parent -- the one with whom the children live at least six months of the year -- has the right to claim dependent deductions for them. But the tax code allows a custodial parent to give these deductions to the other parent by signing IRS Form 8332. If you have three children, this reduces his taxable income by $12,000 in 2015, something that should be taken into consideration when hammering out a fair and equitable divorce settlement. These deductions are far more valuable to the parent with the higher income, so they can be a valuable negotiating tool.
These are just a few of the ways taxes can impact your divorce in NJ. If you have any questions concerning a NJ divorce, call Peter Van Aulen an experienced New Jersey divorce lawyer for a free comprehensive in office consultation.