Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 24, 1995 TAG: 9504250008
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Harry Schwarz, a certified public accountant with Schwarz & Co. in Roanoke, advises that it's important that both spouses arrange the divorce settlement correctly. That's because taxes could cost 45 cents on the dollar if it's not handled properly, he said.
In Virginia, Schwarz said, assets accumulated during a marriage are treated as contributions by both spouses. Property is supposed to be split equitably upon divorce. But that's not necessarily the case. The division depends on how a judge views the circumstances of each case or on the settlement that the parties reach.
A home generally is the largest single asset most couples own. If parting spouses are 55 or older and the value of their house has appreciated, they may be able to exclude from taxes as much as $125,000 of the sale, Schwarz said. If the gain is more than $125,000, it's generally wise to wait until after the divorce to sell the house.
If both parties retain ownership of the home, he explained, both may qualify for the $125,000 exclusion. On the other hand, if you sell the home before you are divorced, you would receive only one $125,000 tax exclusion on a jointly filed return. Married individuals who file separately may claim only $62,500 in exclusions.
If you are younger than 55, you'll face different tax issues when it comes to selling your home.
If you split the proceeds from the sale, Schwarz said, you can defer taxes on the gain if you buy a new residence within two years of the sale date. Tax law allows each former spouse to take advantage of that tax deferral.
Just be sure, Schwarz warned, that your new home costs at least as much as your portion of the selling price of the former home.
But he pointed out that the home must qualify as your "principal residence" in order for you to defer tax on any profits from its sale. Generally, this is the residence you physically occupied for most of the year. If you moved out of the home you shared with your spouse and lived elsewhere for most of the year, you may be liable for taxes on your portion of the gain. Schwarz noted that pending federal legislation, if it passes, would eliminate this problem.
Pensions and retirement funds are another consideration.
Normally, Schwarz said, withdrawals from a pension plan are taxable. But in the case of divorce, you can roll over part or all of the funds to your spouse without paying taxes.
To divide a pension, a court must issue a so-called qualified domestic relations order. This order does not apply to individual retirement accounts. IRA funds can be transferred tax-free by a written divorce decree or a document related to the divorce. The recipient must deposit the money in another IRA within 60 days or pay taxes on the amount.
When transferring any assets such as stocks, bonds or real estate, Schwarz said, it's important to understand that the tax basis of the property also changes hands. The basis - the amount originally paid for the property - is used to calculate gains and losses when the property is sold.
Schwarz said this means that if you receive appreciated property as part of a divorce settlement, you are responsible for paying tax on the appreciation that occurred before the transfer as well as after. He said you should keep this in mind if you plan to sell property you receive as part of a divorce settlement.
Alimony payments are tax deductible by the former spouse who pays them and taxed as income to the one who receives them, according to Schwarz. To qualify for the deduction, alimony must be a monetary payment required by a written divorce decree or separation agreement, along with some other requirements.
Unlike alimony, child support payments are not deductible. To prevent you from from classifying alimony as child support, the IRS has stringent rules in place, Schwarz warned. In general, if an amount specified in the decree is reduced upon a child's reaching a certain age or completing school, that payment cannot be claimed as alimony.
In most cases, Schwarz said, the parent awarded custody is allowed to claim a tax exemption for each dependent child. The exemption can be transferred to the noncustodial parent upon signing federal Form 8332, titled Release of Claim to Exemption for Child of Divorced or Separated Parents. The exemption phases out when income exceeds certain amounts.
Schwarz cautioned against rushing any divorce negotiations. He said you should take time to be sure the settlement provides the financial security you need.
Under the tax law, he said, property can be transferred between former spouses without any tax consequences up to one year after the divorce decree. If you need advice on a settlement, see a certified public accountant.
by CNB