Unraveling the tax consequences of asset division

On a basic level, the goal of property division is to allow couples to split up the assets and property they acquired during the course of their marriage in order to provide a financial footing for post-divorce life. Of course, every couple enters divorce with a unique financial situation, but Alabama family law provides guidelines for how the assets included in divorce should be divided.

Like most states, Alabama’s property division laws follow the principle of equitable division. Rather than a basic 50/50 division of marital assets, they are to be divided in a way that is fairest for both spouses.

Even though equitable division seems like a way for both spouses to exit divorce with relative financial security, it should be noted that there may be tax consequences for handing over certain assets. In addition to a completed divorce settlement, a freshly divorced person could be handed a tax bill.

Generally speaking, couples can transfer a large share of their assets to each other without incurring federal taxes. According to MarketWatch, dividing most kinds of assets won’t result in a federal income or gift tax burden. This may be a major relief for couples.

On the other hand, however, the same report from MarketWatch notes that tax-free transfers may not apply to many types of retirement assets. Couples may be very diligent about creating a nest egg for their golden years, which is why each individual is probably interested in keeping a share of that asset. However, it could be subject to taxation.

When each spouse is considering the tax impacts of divorce, it’s important to look at how large of a share they expect to receive according to the state’s property division scheme. Because spouses may not receive an equal share of assets during divorce in Alabama, one may end up with a larger tax burden than the other. Certainly, making proper preparations can help spouses understand exactly what their post-divorce financial situation will look like.

Source: MarketWatch, “What’s even worse than divorce? The taxes,” Bill Bischoff, Dec. 3, 2013