Tax Implications in Divorce

When people think about divorce, they often focus on custody schedules, the family home, support, and how to emotionally move forward. Divorce tax consequences, however, are often overlooked.  Ignoring divorce tax consequences can turn a seemingly fair settlement into an expensive surprise years later. 

Attorneys at Berner Law and Mediation Group regularly see cases where tax issues, when examined early and thoughtfully, can make a meaningful difference in both short- and long-term outcomes.  Addressing these issues proactively can save spouses significant money and reduce future conflict.  Below are some of the most common (and misunderstood) tax issues that arise in divorce.

Not all assets are created equal.  Retirement accounts may appear identical on paper while having different after-tax values.  Pre-tax accounts, such as traditional 401(k)s and IRAs, are taxed upon withdrawal. Post-tax accounts, such as Roth accounts, have already been taxed and may be withdrawn tax-free under applicable rules. If one spouse retains a $500,000 pre-tax 401(k) while the other spouse receives $500,000 in cash, equity in real property, or a Roth account, the settlement may appear equal, but it is not.  The process of adjusting assets to account for these differences is often referred to as tax impacting, which evaluates the true after-tax value of assets so that comparisons are equitable.  It is one of the most important (and frequently overlooked) steps in creating a fair settlement.

Investment losses do not disappear in divorce.  If a couple has accumulated capital loss carryforwards, those losses may be used to offset future capital gains and reduce future tax liability.  Generally, loss carryforwards remain with the spouse who is awarded the investment account.  However, without careful consideration and explicit drafting, that result may not align with the overall intent of the settlement unless written explicitly in the agreement.  Failing to account for these losses can unintentionally shift thousands of dollars in future tax benefits to one spouse.

Post-divorce tax filing choices can significantly affect cash flow, particularly for parents.  Issues that often require intentional planning include whether a party may file as head of household versus single, how child-related tax credits are allocated, and which party may claim dependency exemptions when applicable.  These decisions should be considered as part of the broader financial settlement rather than left to chance or habit.

Divorce is not the time for each spouse to rely on their own assumptions, or for attorneys to guess at tax outcomes. When appropriate, attorneys at Berner Law and Mediation Group work with financial neutrals and accountants to tax-impact assets, analyze the future tax consequences of settlement options, explain complex financial issues in plain language, and help parties make informed and long-lasting decisions.  Their involvement, particularly in out-of-court processes such as mediation and collaborative divorce, often saves money in the long run by reducing the risk of post-divorce disputes, audits, or unintended tax exposure.  When tax consequences are thoughtfully addressed, settlements tend to be more stable, more transparent, and far less likely to unravel over time.

If you are considering divorce, understanding the tax consequences of your financial decisions can make a meaningful difference in both your short and long-term outcomes. At Berner Law & Mediation Group, we assist clients in navigating these issues through divorce mediation and collaborative divorce in New York and New Jersey, with a focus on clear, practical, and forward-looking solutions. We invite you to contact us to schedule an introductory consultation and learn how thoughtful planning today can help you avoid costly surprises and unnecessary conflict tomorrow.