Spouses need to be cautious that they are not overlooking hidden 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 hidden assets and ensure that they are considered in equitable distribution. Being armed with my book, Frumkes & Vertz on Divorce Taxation, may help.
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.