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The potential tax consequences of a divorce

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The potential tax consequences of a divorce

If you get divorced in Louisiana, your joint assets will be divided equally. This means that you may be required to part with equity in a home, a portion of a retirement account or a portion of a taxable investment portfolio. You may want to take a look at the potential tax consequences of ending a marriage.

You might need to pay capital gains taxes

When you sell a home, shares of stock or other assets for a profit, you have incurred a capital gain. Depending on the details of the transaction, you may be required to pay capital gains tax. It’s important to note that the first $250,000 in profits from the sale of a primary residence can be retained tax-free. That figure increases to $500,000 if the home is sold before the marriage ends.

Dividing a retirement account improperly could trigger a taxable event

It may be possible to avoid paying income taxes on withdrawals from a 401(k) that are made pursuant to a qualified domestic relations order. Funds can typically be withdrawn from an IRA without having to pay income taxes, assuming that the withdrawal is pursuant to a divorce decree. However, if you take money out of an account before a formal order is issued, you’ll likely need to pay income taxes on that money at your ordinary rate.

Alimony is no longer tax deductible

Prior to 2019, spousal support was considered income to the person who received it, and the person who made monthly payments could deduct them from his or her own taxable income. However, if your divorce was finalized after the first day of 2019, you don’t need to include alimony payments on a tax return. Furthermore, those who make these payments are not entitled to a tax deduction.

A divorce can have a significant impact on your finances. Therefore, it may be in your best interest to have an attorney review a settlement before it goes into effect. Doing so may reduce the chances of receiving a tax bill that you weren’t expecting.

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