Few family situations are more complicated than going through a divorce, but not all divorces are created equal. For example, high net worth divorces between individuals can be particularly complicated because of the complex variety of assets and liabilities that must be divided up in the divorce. Because of this, taxes and divorce in California require specialized attention from seasoned professionals.
- Alimony and Spousal Support
- Complex Assets
- Coordination and Planning
- Filing Your Taxes
- High Net Worth Divorces with Silva & Associates
Alimony and Spousal Support
One of the tax implications high net-worth divorcees must handle stems from spousal support, also known as alimony payments, transferred from one ex-spouse to another. These typically occur if one spouse makes significantly more than the other so that the lower-earning spouse can maintain their standard of living after separation.
Until recently, the ex-spouse who paid spousal support could deduct their payment on their federal taxes, while the ex-spouse who received spousal support was required to report it as income on their taxes. While this system still applies to California state taxes, it does not apply to federal taxes in divorces completed after January 1, 2019.
It is worth noting that this tax implication is only relevant to spousal support payments, not child support payments. Child support payments cannot be written off as a tax deduction, nor are they to be reported as income.
Another reason high net-worth divorce taxes can be so difficult to calculate is that couples with more money tend to have a broader range of assets. High net-worth couples are more likely to have their money tied up in real estate, businesses, investments, retirement accounts, etc., and there are many different ways a couple may choose to split these assets when they separate.
Retirement accounts, such as 401(k)s, IRAs, and pensions, are often very large assets even though they don‘t jump to the front of mind when thinking about division of assets during a high net worth divorce. A Qualified Domestic Relations Order (QDRO) may be necessary for some retirement accounts to divide them up and facilitate tax-efficient transfers. For all types of retirement vehicles, the division process must follow specific rules to avoid early withdrawal penalties and taxes.
Capital gains taxes are something that many transactions can be structured to avoid or minimize. Generally, the sale of marital property, such as real estate or investments that have increased in value since purchase, can trigger capital gains taxes. Careful structuring of deals, proper planning, and good timing can help minimize the tax impact of such transactions when expert advice comes into play.
Reasons like this are why it’s essential to work with a law firm that partners with outside experts such as CPAs and financial planners who can create a clear financial picture for you. Often, splitting assets in a divorce requires a significant amount of work surrounding company valuations, the sales of assets, or new agreements about how to manage assets that will remain shared.
Coordination and Planning
Many divorces quickly become contentious and hostile, and when there is a lack of trust between spouses, a divorce can turn into a bitter battle over child custody, assets, and more. Not only is this likely to lead to a more drawn-out and expensive divorce process, but it is also more likely to lead to worse financial outcomes, especially for high net-worth individuals.
When ex-spouses can come to the table and be open and fair, the lawyers and financial advisors have more options for minimizing tax liability. This can help both parties come to an arrangement that saves them time and money, allowing them to return as close as possible to their pre-divorce financial comfort.
Filing Your Taxes
Cooperation can also open up the option to continue to file taxes jointly during the divorce. Of course, the possibility of filing a joint return is only available before the divorce decree is issued. Nevertheless, this option can benefit many couples during the divorce process, saving them significant money.
Another option available to some individuals is to file their taxes as “head of household.” You can do this if:
- your spouse has lived somewhere other than at your home for the past six months,
- your home is the primary home where your child stays,
- and you have paid more than half the cost required to maintain your home in the past year.
If these apply to you, you may want to consider filing as “head of household” because you will qualify for a higher standard deduction and likely be taxed at a lower rate than if you filed as a single person or with your spouse as married filing separately.
High Net Worth Divorces with Silva and Associates
High net worth divorces, on average, will take longer than the typical divorce case because full disclosure is required by law. Providing the other side with a full understanding of the assets the community owns and other aspects of your financial situation can take time, even if there are not fights over what make up the community pie. Making decisions on how to address issues related to property, income, and finances can often be a complex process.
Because of this, these divorce cases are also often more expensive than average, since you may need to work with accountants, appraisers, or other financial experts during the divorce process. Proper preparation and good guidance will help you to complete the divorce process more quickly and efficiently. If you’re looking for a divorce attorney in the Bay Area with the experience and the connections required for handling a complicated divorce, consider working with Silva & Associates. Our experienced team can take on the most contentious court battles while also knowing when to use mediation and other strategies to get things sorted outside the courtroom.
Our connections to forensic accountants, financial advisors, and CPAs mean that we are uniquely capable of handling cases dealing with divorce, and the multitude of tax implications created by it, between high net-worth individuals. Contact us today to request an appointment, and a member of our team will be in touch with you!
High Net Worth Divorces FAQs
Are all assets subject to the same tax treatment in a high net worth divorce?
No, different types of assets may have varying tax treatments during a high net worth divorce. For example, while some assets may be subject to capital gains taxes, others may have different tax consequences, such as ordinary income taxes or tax-free transfers.
Are child support payments taxable or tax-deductible in a high net worth divorce?
Child support payments are neither taxable to the receiving parent nor tax-deductible for the paying parent in a high net worth divorce. Child support is typically treated as a tax-neutral transaction.
How can I ensure compliance with tax laws during and after the divorce?
To ensure compliance with tax laws, it is crucial to maintain accurate records and adhere to the terms outlined in the divorce settlement. Seeking advice from tax professionals can help ensure proper reporting and tax compliance.