Divorcing couples need to be informed about the potential tax consequences of any financial decision they make. The wrong decision can cost you thousands of dollars. The surest way of avoiding these mistakes is to have the help of a financial professional like a certified public accountant (CPA) participating in the divorce process.
Not all assets are equal, even if they seem to be.
For example, if you sell your home, and you have lived there as your principal residence for two of the last five years, that can be a sale that will have no tax consequences on your equity. For this example, assume you cleared $500,000 equity.
You may think that instead of selling your home, you will withdraw $500,000 from your retirement account. But that is a taxable event.
The upshot is that from the sale of your home, you have $500,000 nontaxable funds. On the other hand, the $500,000 from your retirement fund is taxed. So, you can see how the amount that ends up in your pocket from each event is not the same.
Do not take money out of your retirement account.
The second tip is to not take money out of your retirement account prior to age 59 ½. If you do, not only will the money be taxed, but a penalty will be imposed. Currently, it is a 10 percent penalty to the IRS and a 2 percent penalty to the California Franchise Tax Board.
These are just a couple of pitfalls you may encounter when navigating your divorce settlement. Some can be avoided with the help of a CPA. For example, it may be possible to have funds from a retirement account roll over into another retirement account in a way that does not tax the funds that go into the new account.
Heberger & Company Can Help
For more information about how a CPA can advise you about tax consequences and how to avoid them when negotiating your divorce settlement, contact us at Heberger & Company an Accountancy Corporation