Filing for divorce may have a significant impact on your physical and mental health. However, it may also have an impact on your finances as ending your marriage may trigger taxable events that may influence your Maryland and federal returns. A tax liability may reduce the true value of a house, brokerage account or other assets that you may covet in a divorce settlement.
What to know about capital gains taxes
If an asset is sold for a profit for any reason, you are said to have incurred a capital gain. Capital gains are typically taxable in the year that they are realized. The amount that you owe will typically depend on your income, the type of asset sold and how long you held it prior to the sale.
You may owe income taxes on retirement assets
Income taxes may be levied on retirement funds that are withdrawn pursuant to a divorce decree. An early withdrawal penalty may also apply if funds were withdrawn prior to the official end of your marriage. However, you may be able to avoid paying any taxes or penalties by rolling funds into an IRA or 401(k) in your name.
Your tax status will change
After your marriage ends, you will no longer be file a joint income tax return with your former spouse in subsequent years. Furthermore, your tax bracket will be based on your own income as opposed to what you and your spouse brought in each year. This may mean that you are eligible for credits or deductions that weren’t available while married. Of course, it may also mean that you pay more to the government each year depending on your circumstances.
Ideally, you’ll spend time analyzing the potential tax consequences of getting divorced before filing any paperwork. It is also important to analyze the value of a divorce settlement after taxes in an effort to make sure that you are getting an equitable share of marital property.