A serious tax-planning mistake could cost you thousands of dollars.
In this article and the companion Part 1, you will find general answers to FAQ’s concerning Charleston divorce taxes. You should use this information as a starting point for developing a divorce settlement strategy with your Charleston, SC divorce attorney.
1. Do I have to pay income tax on the property that I receive as part of my Charleston divorce?
As part of the equitable division of marital property by your Charleston divorce judge, ownership of your property will change. For example, you might receive – as part of your divorce or legal separation – a business, a vacation home, the marital home, stocks, various investments, bank accounts, or retirement accounts.
You will not be taxed on the transfer of the marital property to or from your former spouse if the property transfer: (a) occurs within one year after your divorce becomes final; or (b) is made under your original divorce decree and the transfer occurs within six years after your marriage ends. There are certain important exceptions that could extend the tax-free transfer beyond six years.
The tax-free transfer rule for divorce property applies only to transfers between spouses. If you transfer property – as part of your Charleston divorce – to someone for the benefit of your former spouse, any recognized gain or loss on the transfer of the property will be taxable to your former spouse. For more information on this technical subject, you should consult with your C.P.A. or a divorce lawyer in Charleston, SC.
2. Do I have to pay income tax if I sell the marital home?
If you sell the marital home after your Charleston divorce, you can probably exclude the first $250,000 of capital gain that you receive from the sale. If you and your spouse sell the marital home before your Charleston divorce becomes final, the two of you can probably exclude $500,000 of capital gain. There are significant exceptions to these general tax principles, which I discuss in my article “Divorce, Taxes, and the Sale of Your Home.”
3. Do I have to pay taxes, interest, and penalties for a joint return that was filed before my Charleston divorce became final?
You are generally liable for any taxes that may be owed for any joint marital income tax return – regardless of what your divorce decree or Charleston divorce settlement may say regarding the duty of your former spouse to pay such taxes, interest, and penalties.
There are three narrow exceptions to this broad principle of joint tax liability. Your Charleston divorce attorney may be able to persuade the IRS to grant you relief under the concepts of: (a) innocent spouse; (b) separation of liability; or (c) equitable relief. Additional information regarding these possible exceptions can be found in the IRS Topic 205 Publication.
4. Who will have to pay taxes if a Charleston divorce judge orders alimony to be paid?
As a general rule, the person receiving alimony must pay income taxes on the money received. However, there are exceptions to this general principle. For more information, you should read my article on “Charleston Alimony Tax Tips.”
5. What will be my tax basis for property that I receive from my Charleston divorce?
If you receive the marital home, investments, a business, or other property as part of your Charleston divorce, you will “step into the shoes” of your former spouse regarding the adjusted tax basis of the property. This means that, when you subsequently sell or otherwise dispose of such property, your tax basis in the property will be measured from the original date of acquisition of the property (plus or minus adjustments), not the market value of the asset on the date on which your former spouse transferred the property to you.
If you paid your spouse for his/her share of the equity in the transferred asset, it will not affect your tax basis in the asset. You can take credit only for the costs incurred before your divorce.
This is a highly technical tax matter, which you should discuss with your tax advisor and Charleston divorce lawyer. There are various exceptions that may alter or affect the tax treatment of any asset that you may receive in your divorce. Your divorce attorney must exercise great care to be sure that a divorce property transfer is not treated as taxable alimony.
At a minimum, you should work closely with your Charleston divorce attorney to obtain all documents and records that may be needed to establish your tax basis for each asset that you receive. With those records in hand, you can obtain a specific opinion from your C.P.A. regarding your exposure to tax upon the subsequent disposal of any asset that you receive in your Charleston divorce.
HELP FOR YOU
As an experienced divorce lawyer in Charleston, SC,I can answer your Charleston divorce law questions.To speak directly with me, please call me now at 843-631-7117.
Alternatively, please use the contact form to ask me any questions that you may have regarding your Charleston divorce or legal separation case. I will be quick to respond.
Working together, we will protect your rights and build a better future for you in Awendaw, Charleston, Daniel Island, Goose Creek, Isle of Palms, James Island, Johns Island, Kiawah, Mount Pleasant, North Charleston, Sullivan’s Island, Summerville, or West Ashley.
Since there are so many exceptions to the general tax principles, which I discuss above, you should not rely on this information in making your tax decisions. Instead, you should seek professional advice from your tax advisor or Charleston divorce attorney on how to reduce your specific post-divorce tax liability.