Disclosures: A.M. Financial provides supporting financial information, evaluation and analysis to be utilized by the client and the client's selected attorney if directed, during the process of their divorce.  Services provided in regards to this agreement are solely fee-only and do not involve investment or security advice or insurance transactions.  All information is financial in nature and should not be construed or relied upon as legal or tax advice.  A.M. Financial IS NOT AN ATTORNEY AND DOES NOT PROVIDE LEGAL OR TAX ADVICE.  Individuals are encouraged to seek competent legal and tax advice from professionals who specialize in divorce and tax laws in their respective state.

Investment advisory services offered through WealthSource Partners, LLC ("WSP"), a registered investment adviser.  Amy Mahlen (CRD #4692263) is an Investment Adviser Representative of WSP.  Registration with the U.S. Securities and Exchange Commission does not imply any certain level of skill or training.The statements and opinions expressed by A.M. Financial are those of Amy Mahlen and do not represent the views and/or opinions of WealthSource Partners, LLC ("WealthSource") or any other associated or affiliated person of WealthSource. Furthermore, the statements and opinions expressed are for informational and educational purposes only and should not be construed as legal, tax, accounting or investment advice. All statements and opinions are current only as of the time made and are subject to change without notice.  A.M. Financial and WSP are independent and unaffiliated entities.

This website is a publication of A.M. Financial. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Content should not be viewed as personalized investment advice or as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. A professional adviser should be consulted before implementing any of the strategies presented.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Avoid Tax Landmines While Transferring Assets Post-Divorce

Your divorce is final, you can finally breathe and start to rebuild.  The next item on your to-do list is complying with your agreements and facilitating the division of property.  Transferring property can be tricky and sometimes trigger unintended tax consequences.  Typically this happens to individuals who are not financially savvy, assume everything was addressed in their separation agreements including any form of taxes, do not seek assistance from a financial professional and are in a rush to get all the loose ends tied up to get on with the rest of their lives. 

 

The following information will help you steer clear of potential tax landmines during the transfer process:

Tax-Free Transfers

Property transfers pursuant to a divorce as outlined in a divorce agreement are tax-free under section 1041 of the tax code.  Before you make the assumption that this is going to be easy, continue reading.  This means the asset transfers tax-free, such as an investment, cars, furniture, retirement accounts, etc.  For example, if Anna is awarded $100,000 (or 65 shares) of Joe’s Amazon stock, in order for the transfer to be tax-free Anna will need to open an account and have Joe instruct the institution to transfer the 65 shares of Amazon stock to Anna.  Transferring the Amazon stock, the asset, to Anna is tax-free.

 

Hidden Landmine

If Anna tells Joe to sell the Amazon stock and write her a check for the proceeds, will this be a tax-free transfer?  Technically, the cash, the asset transferring, will transfer tax-free.  However, the hidden taxable event occurs when Joe sells the stock.  Joe will receive tax documents stating how much of the Amazon stock sale is taxable which will be required to be reported as a gain (or loss if applicable) on his tax return.  Since Joe purchased these shares of Amazon 10 years ago for $5,000, he will have realized a $95,000 investment gain which is most commonly taxed at 15%, therefore incurring a $14,250 tax bill.

 

Retirement Accounts

Retirement accounts have special tax advantages.  Therefore, when investments are sold within a retirement account it is not a taxable event, unlike the prior example.  However, a cash withdrawal from a retirement account is a taxable event and generates a 1099R tax form.  Similar to the previous example, if Anna opens an IRA account and Joe signs a distribution form pursuant to divorce including a copy of their separation agreement, assets transfer from Joe’s IRA to Anna’s IRA will be tax-free. 

 

Hidden Landmine

If Anna tells Joe that she needs the money from his IRA account and to write her a check, will this be a tax-free transfer?  Unfortunately for Joe, any amount distributed from Joe’s IRA that does not go directly into another IRA with instructions that the transfer is pursuant to divorce will be fully taxable to Joe.  For example, if Joe distributes $50,000 from his IRA to write a check to Anna, $50,000 will be reported as taxable income to Joe.  Assuming a 24% tax rate, this transfer would cost Joe $12,000 in unforeseen taxes.

 

Conclusion

The best way to avoid unintended tax landmines during the highly stressful and expensive time of divorce, is to work alongside a Certified Divorce Financial Analyst who can help facilitate a smooth and effective post-divorce transfer plan.

 

Let’s build a post-divorce financial strategy that works best for your future! 

 

You wouldn’t retire without a financial plan… it might be messy! 

 

Don’t divorce without one either!

 

Get the information you need to get started here, or

Click here to schedule a free initial consultation with Amy

Disclosure: Divorce transition/financial planning services offered by A.M. Financial. Investment advisory services offered through WealthSource Partners, LLC ("WSP"). A.M. Financial and WSP are independent and unaffiliated entities. The statements and opinions expressed are those of A.M. Financial and Amy Mahlen and do not represent the views and/or opinions of WSP or any other associated or affiliated person of WSP. Furthermore, the statements and opinions expressed are for informational and educational purposes only and should not be construed as legal, tax, accounting or investment advice. All statements and opinions are current only as of the time made and are subject to change without notice.