For those who are not prepared during a divorce or other breakup, experiencing tax fallout can feel like getting the wind taken out of them. In other words, they may be blindsided, that is, totally unprepared to account for thousands of dollars in additional tax liabilities or lost tax savings.
Tax surprises can also happen in the world of alimony, child support, and child custody, such as in the case of who gets to claim the valuable dependency exemptions and child tax credits. When dividing up marital property, however, taxes can create some particularly nasty surprises.
For instance, many couples in Massachusetts, even those who are not particularly well-to-do, may have rental homes and other investments between them. Should they choose to divide them up, either as part of a divorce, a legal separation or just an informal parting of ways, they must remember that there may be capital gains tax issues to consider.
For instance, in the course of a divorce, there are ways in which one spouse can transfer property to another that will not cause the IRS, or the state, to impose a capital gains tax on the increase in value of the investment. However, there are certain legal rules the couple must follow to accomplish this.
More importantly, the fact that the couple did not pay a capital gains tax at the time does not mean that they will never pay it. So, if a couple bought a property for $100,000, and it was worth $200,000 when the ex-wife took it as part of a divorce, she will pay tax on $200,000 of gains if she later sells for $300,000. Those who have questions about their divorce may wish to contact an attorney.