Mediation Conversations: Taxes and Divorce

For those of you contemplating a divorce in New Jersey, you will want to learn more about the equitable distribution of marital assets and liabilities and how this will impact your settlement. We at Equitable Mediation Services follow a three step process in order to help divorcing couples come to an agreement on equitable distribution but be warned: it’s not as simple as just three steps.  There are many factors to consider including:

• Goals: short term or long term?
• Liquidity: do you need cash now or can you wait for a bit to get it?
• Taxes: are the assets you are receiving taxable or non-taxable?

For today’s post, let’s look a little bit at the taxable effect of equitable distribution during a divorce.  For the most part (insert strong legal disclaimer here) I can tell you as a divorce mediator in New Jersey, the distribution of assets which occur due to a divorce action are tax-free; i.e. assets can be transferred from one spouse to another without either of them paying any taxes or penalties.  But (and here’s the important part) once one of you goes to sell or convert those assets after they have been transferred, there may be taxes, and rather substantial ones, on the sale or transfer of that asset so it’s important that you have a good hard look at just exactly what you are getting in your memorandum of understanding and final property settlement agreement.

Take for example the marital home.  Seems like a good idea to keep the house, right?  Consider this: as a married couple, you are entitled to a $500,000 capital gains tax exemption under current tax law.  But if you buy the house out on your own and then go to sell it down the road when you are a single person, you will only get a $250,000 capital gains exemption under current tax law.  This could result in a significant tax hit should you make more than $250,000 on the sale of your home so it’s important you save those receipts from all those projects you did around the house and consult with your accountant to determine strategies that may save you money in the long run.

What about brokerage accounts?  Let’s say you have the choice of a savings account worth $5,000 or $5,000 worth of stock in Google.  Which one would you take given they were worth the same amount of money?  Even if you take it as a part of your property settlement and sell it right away, there may already be gains built into it from when you first bought it.  You may wind up paying taxes on something that did not escalate in value while you owned it alone.  That savings account comes to you tax free since there is no “capital gain” and you would only pay taxes on any interest you earned after you took possession of the account.  And depending on your particular goal, a savings account is liquid and can be used to do anything you want so it’s important to consider your goals as we listed above.  Having a divorce mediator with a masters degree in Finance like I do can certainly come in handy in situations like these as I am acutely aware of the taxable effect of assets and can provide you with the most accurate information to help you make an informed decisions.  And really, isn’t that what mediation is all about anyway?  You controlling your future and getting the settlement that works for both of you?

While this is meant to show a simple example, I encourage you to speak with an accountant or financial planner who can better assist you while going through your divorce and help you make wise equitable distribution decisions.  But if you have any questions about divorce mediation or how mediation can benefit you, please feel free to contact us to schedule a free, no-obligation consultation in one of our six central New Jersey office locations where we will take some time to get to know more about each of you and your situation and see if mediation is right for you.  Of if you’re simply not ready yet, feel free to visit the Equitable Mediation Services website where you’ll find lots of great information about parenting plans, equitable distribution, NJ child support and spousal support / alimony and contact us when you’re ready.  We look forward to helping you get through your divorce peacefully, efficiently and with as little stress on you and your family as possible.