Mike Benaglio, a financial planner based in Austin (and a Collaborative Law Institute of Texas member) who specializes in collaborative law cases, was on Fox 7′s Good Day Austin show earlier this week, just in time for this year’s tax-filing deadline, to discuss divorce and taxes.
This is an expanded version of the points he spoke about on air with host Katherine Kiesel:
Don’t assume you know tax rules — always asks a tax expert whatever questions you have about your assets, your known tax liabilities, income, and deductions.
Don’t make financial decisions that might impact divorce before asking a tax expert. (Preferably, ask the expert who has done your taxes and your spouse’s taxes in the past.)
If your spouse has always done the tax returns, get copies and take them to an accountant you trust.
Most importantly, don’t leave everything up to your spouse when it comes to divorce proceedings.
He also reviewed the most common questions regarding divorce and taxes — here they are, with answers:
Is the property settlement taxed?
Answer: The financial assets, liabilities and the stuff we divide is not a taxable event. You’ve paid the tax once to accumulate it — so there’s no need to donate again.
Can I cash out my or my spouse’s retirement account without penalty?
Answer: If you need to cash out a retirement account to get immediate cash there is normally a penalty of 10% in addition to the tax charged usually at 20% but ultimately you will pay the tax rate that is applied when you file your return.
The IRS will waive the 10% penalty under certain conditions. It is a little known Code # 72(T)(2)(C). It is available on a qualified plan and 401(k). It has to be your spouse’s retirement account, you have to be less than 59½ years old and only for plans that are divided by a Qualified Domestic Relations Order (QDRO).
Getting a distribution from an IRA is trickier and you have to follow the requirements very carefully to avoid the penalty. If you just want to divide a qualified plan, like a defined benefit plan, defined contribution plan or 401(k), the administrator will only divide or transfer through a QDRO. The exception is an IRA, which only needs a divorce decree to transfer the funds to the other spouse’s new IRA.
Is my spousal support taxed?
Answer: It can be contractual alimony, which generally is taxable to the recipient and deducted by the payor. But it can be structured as a non-taxable event to both spouses. Be sure to involve your tax preparer before signing on the dotted line to review the requirements and advantages for each approach.
