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Understanding the tax liabilities in divorce

Divorce has the potential to significantly impact an individual's financial future. Although most people don't enter a marriage planning for divorce, doing so may help protect you from taking on unnecessary tax liabilities or a substantial loss.

Divorce and the property division associated with it may have immediate and lasting financial and tax consequences for both spouses. Even though asset and property division is a common and necessary step in divorce, working with an attorney to create an effective property division agreement may help alleviate some of the adverse financial effects it often produces.

Generally speaking, divorcing spouses can transfer assets and cash between one another without creating a taxable event, so long as the asset or property transfer was due to the divorce. This, however, is not always the case. If divorcing spouses are fortunate enough to have accumulated substantial assets like stocks, bonds or mutual funds, dividing these assets may leave divorcing spouses subject to a capital gains tax.

If divorcing spouses see their marital home as their most valuable asset, they may be able to avoid a capital gains tax on the sale if they reinvest their proceeds within two years. In order to avoid this tax liability, there are several requirements that must be met. A spouse may lose their eligibility to avoid this tax if their ex chooses to remain in the marital home for a certain period of time after the divorce.

In complex divorce cases, there are often many more factors that go into a property division settlement agreement. If, for example, there are substantial retirement funds in question, there are certain tax laws that divorcing spouses must adhere to in order to divide those funds. Working with an attorney to address these issues may help reduce or eliminate these liabilities.

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Goddard & Malmquist
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Barrington, IL 60010

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