Getting divorced in Arizona? You need to factor in taxes

May 22, 2013

Getting divorced in Arizona? You need to factor in taxes

Article provided by Viles Law Office, LLC
Visit us at http://www.vileslawoffices.com/

To paraphrase an old adage, the only certainties in life are death and taxes. At the end of your marriage, taxes are probably the last thing on your mind. But, when it comes time to split up the marital property, taking tax considerations into account can save you thousands in the long run.

The face value of assets does not always accurately reflect their true worth

Arizona is a community property state, which means the default rule is that divorcing couples split marital property 50-50. However, there are exceptions, and certain property, like that acquired prior to the marriage or inherited only by one spouse, is not considered part of the marital estate and thus should be retained in its entirety by the individual owner. Generally, divorcing Arizona couples may negotiate an agreement that structures property division in the way they see fit, and if the agreement is reasonable, a court will approve it.

There can be value building opportunities in property division; certain assets may be more important to one former spouse than the other. For example, perhaps one spouse wants to stay in the family home, but for the other spouse, it is more important to retain a significant interest in the retirement account. In return for a full ownership interest in the home, the former spouse can offer a greater share of the retirement funds in the separation agreement. Or, perhaps one spouse will offer to pay more in spousal support/alimony in return for a larger proportion of the marital property.

Even though this type of negotiated agreement can be beneficial for both partners, it is extremely important to evaluate the tax consequences before accepting any deal. Even though two types of assets may have the same market value, in reality one may be worth far more than the other when taxes are factored in.

Imagine that during the marriage you and your partner owned $50,000 worth of stock in a company. In a property division settlement, is it fair for one partner to take the stock in exchange for the other taking $50,000 in cash held in a joint bank account? Perhaps, but perhaps not. If the stock was acquired at a lower price and has since appreciated in value, when it is sold and the cash value is realized, the stockholder will have to pay taxes on any gain. This means that $50,000 in stock could in fact be worth significantly less than its face value, and the same may be true for any type of asset that appreciates in value over time.

The future tax impact of spousal support, also known as alimony, also has to be considered. Typically, alimony is deductible on the tax return of the one paying it, while it is considered taxable income for the recipient.

Get help from an attorney to ensure you get the most out of your settlement

Structuring a property settlement to maximize tax advantage can be a complex undertaking. Yet, with the right legal help, taking taxes into account can pay off big time in your divorce settlement.

If you are facing divorce, get the legal help you need to better your financial outcomes: talk to an experienced family law attorney today.