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How to limit the IRS' share of your divorce settlement

Divorce signals numerous changes in an individual’s life. In addition to changes to one's living situation child custody arrangements and personal finances; individuals going through the divorce process would also be wise to understand the possible tax implications related to the division of certain assets.

When negotiating a divorce settlement, it's important to keep in mind that some transfers of assets and property will likely to be subject to capital gains taxes. While the basic transfers of assets and cash that are common in divorce are typically not subject to taxes, an individual will be forced to pay taxes on any profits related to investments accounts and stocks. In some cases, taxes can be significant and these types of cuts in profits should be taken into account when negotiating a divorce settlement.

Divorcing spouses, who decide to sell a previously-shared home, are often eager to reap the profits. Such profits, however, are again subject to capital gains taxes. It's important to note, however, that an individual can avoid paying capital gains taxes on profits from the sale of a home if he or she chooses to reinvest "the home sale proceeds within two years." One stipulation to this tax break is that an individual must be able to prove that the home was his or her primary residence during three or more of the last five years.

Individuals going through the divorce process can also reduce tax liabilities by filing jointly with a soon-to-be ex-spouse. For individuals who don't trust an ex or who fear that he or she may incur tax penalties or fines, it's wise to enlist the assistance of a tax professional or attorney who can help gather important tax documents and ensure for the accuracy of a tax return.

Source: FindLaw.com, "Divorce, Taxes, and Your Estate Plan," March 24, 2015

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