Are You Overlooking Tax Assets in Divorce?
Spouses need to be cautious that they are not overlooking tax assets in divorce proceedings where marital or community property will be divided. Tax assets and liabilities may be less obvious than houses, cars and furniture, but often they are just as valuable. An experienced family lawyer can identify tax assets and ensure that they are considered in equitable distribution. Being armed with my book, Frumkes & Vertz on Divorce Taxation, may help.
Overlooking tax assets in divorce
Some of the most common tax assets and liabilities include:
- Tax refunds – Refunds that are paid after a marital separation may be marital or community property if the refund relates to income earned prior to separation.
- Over-withholding – If a spouse’s employer has withheld more than necessary to pay income taxes, or a spouse has overpaid their estimated quarterly tax payments, there might be a refund in the pipeline. The over-withholding may be marital property if it was paid prior to the date of separation.
- Loss carry-forwards – The Tax Code limits the amount of investment losses that can be offset against taxable income. Losses that exceed the limit may be carried forward into future tax years. Those carry-forwards may have substantial value, especially for taxpayers in higher tax brackets. If the losses were incurred before spouses were separated, the carry-forwards may be marital property.
- Debt forgiveness – Some spouses who have credit card debt negotiate write-offs with their creditors, by paying a portion of the debt and obtaining forgiveness of the balance. Don’t forget that write-offs are tax liabilities, as most credit cards will issue a 1099 in the amount of the forgiveness.
- Taxable gains – Investments, vacation homes, and rental real estate that have appreciated in value may have tax liabilities when sold. These tax liabilities should not be overlooked in equitable distribution proceedings.
- Qualified retirement accounts – Because they are funded with pre-tax dollars, retirement accounts such as 401K and IRA accounts contain built-in tax liabilities that should be considered when assessing their net value.
Business owners, executives, professionals and their spouses should also consider:
- Trapped-in gains – Some businesses own assets that have grown in value since they were acquired (such as real estate or investments), or have been depreciated yet have substantial value if liquidated (such as durable equipment). These assets have tax liabilities associated with them, which affects their value.
- Capital accounts – Capital accounts are a method of tracking each partner’s contributions, withdrawals and share of profits generated by a company. If a partner’s capital account goes negative, then that partner might experience a tax liability when the company is sold or liquidated.
- Accounts receivable – Medical and dental practices, law firms and other service businesses often have accounts receivable and work-in-progress on their balance sheet. If the books are kept on a cash basis (as partnerships and most LLCs are required to do), the accounts receivable must be discounted for the income tax liability that will be incurred when the revenues are collected.
To avoid overlooking tax assets in divorce, consult my book Frumkes & Vertz on Divorce Taxation. In Western Pennsylvania, call me (Brian C. Vertz 412-471-9000) for a family law consultation or visit my firm’s website, pollockbegg.com.