Tax Implications in a High-End Divorce

By Sheryl Rentz on February 16, 2015

If you have never gone through a divorce before, you may be unaware of all the potential consequences of your separation. For example, there are substantial tax implications to a divorce. In general, you can divide most of your assets without any federal income or even gift tax consequences, but there are exceptions to the rule.

There is an opportunity to make tax-free transfers before a divorce and when a divorce becomes final. This means that you can receive tax-free treatment when exchanging stock and transferring vacation home ownership as long as the exchanges are made because of a divorce. For years, the IRS would get involved when couples transferred vested stock options, but you no longer have to claim the fair market value of all the stocks you move because of a divorce. However, you or your ex will have to recognize the income when the asset is sold, converted to cash, or exercised.

Even when the tax-free transfer applies, there are still potential tax implications. You can transfer a stock to your spouse during a divorce tax-free, but if your spouse ultimately sells the shares, he or she (and not you) will owe the resulting capital gains taxes.

Retirement accounts are a big exception to the tax-free transfer rule. The tax-free transfer rule does not apply to certain tax-advantaged retirement accounts such as IRAs. It also does not apply to employer-sponsored retirement plans. For a 401(k), you will need to include language in your divorce papers establishing a Qualified Domestic Relations Order. This will make your spouse responsible for any taxes on his or her share. It is possible to split up an IRA without taking a major hit, but you will need legal guidance.

If you have a healthy net worth or if you have high income, you will need legal assistance to understand the tax consequences of your divorce. A knowledgeable Pennsylvania divorce lawyer well versed with tax issues and experienced with high-end divorce cases can help you better understand your legal rights and options.