Tax Implications in High-Income Divorce Settlements

In a high-income or high-asset divorce, there are many considerations. Yes, the parties receive more money and assets, but they also have higher tax obligations. To protect your long-term financial interests, speak with our experienced divorce lawyers who can help you navigate these complex issues.

Tax consequences can differ significantly in high-income divorce settlements. Because wealthier couples often have more complex assets, such as investments, business interests, stock options, and multiple properties, the tax implications of dividing those assets can be substantial.

For example, capital gains taxes may apply when selling investment property or stocks as part of the settlement. Transferring retirement accounts or stock options also has specific IRS rules that must be followed to avoid early withdrawal penalties or unexpected tax liability.

Taxes may also be tied to dependents, real estate taxes, business income, and deductions or credits from investments or charitable giving. Here is a more detailed look at tax obligations.

Tax Treatment by Asset Type

When dividing assets in a divorce, it is important to consider tax treatment by asset type, as different assets are taxed in other ways:

• Cash: Transferring cash between spouses as part of a divorce settlement does not create tax liability. If done in accordance with the divorce decree, no gift tax applies, even for large transfers made after the divorce is finalized.
• Real estate: Each spouse may exclude up to $250,000 in capital gains from the sale of a jointly owned primary residence ($500,000 if filing jointly), provided the home was a primary residence for at least two of the past five years. If one spouse moved out long ago, they may lose eligibility. A separation agreement can preserve the exemption if one spouse continues to live in the home.
• Brokerage accounts: The tax impact depends on the holding period and cost basis of investments. Assets held for one year or less are taxed as ordinary income (up to 37%), while long-term gains are taxed at 0%, 15%, or 20%, plus a possible 3.8% net investment income tax for high earners. Even accounts of equal value may have different after-tax outcomes, especially if one spouse is in a higher tax bracket. Strategically dividing assets can help ensure a fairer post-tax result for both parties.
• Collectibles: Items like art acquired during the marriage are divided as marital property, except for gifts. Transfers are tax-free, but later sales can trigger capital gains taxes based on the original purchase price.
• Jointly owned businesses: A business is typically treated as marital property and divided in two ways:
  • Sell and split: The business is sold, and proceeds are divided, subject to taxes.
  • Buyout: One spouse buys out the other with cash or equivalent assets. The seller may owe capital gains taxes, while the buyer gets a stepped-up cost basis.

Consult a Tennessee High-Income Divorce Lawyer About Tax Impact

High-income divorce settlements can yield significant assets, but they are subject to taxes. You must set aside money to cover tax liabilities. A Murfreesboro divorce attorney from David L. Scott can help you understand the tax implications of divorce settlements. To schedule a consultation with our office, contact us online or call (615) 896-7656.