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First Scenario—Husband Transfers Using a Minimal Basis Stock |
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|
‘ |
Husband |
Wife |
|
Transferred FMV of shares |
$35,000 |
$35,000 |
|
transferred cost basis of shares |
30,000 |
8,000 |
|
Taxable profit upon sale |
$5,000 |
$27,000 |
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Second Scenario—Husband Transfers Shares Similar To Cost Basis |
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|
|
Husband |
Wife |
|
Transferred FMV of shares |
$35,000 |
$35,000 |
|
Transferred cost basis of shares |
19,000 |
19,000 |
|
Taxable profit upon sale |
$16,000 |
$16,000 |
From the illustration above, the FMV is as important as the cost basis. This should be evaluated carefully by advisors and attorneys to ensure a fair settlement and asset distribution.
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Residence Sale
According to section 121 of the IRC, a couple intending to sell their home can generate about $500,000 in profits from selling a single primary home. Customary, a spouse will move out while the other remains in the house, even if the title of the house is still owned by the spouse that left. In this situation, language must be added to the arrangement to safeguard the party that departed and generates up to about $250,000 in profits.
Business operations
This is usually the most challenging aspect of a divorce to resolve. In most cases, a spouse is limiting the value of the business while the other spouse is putting the value overboard. Conventionally, the most active spouse would be permitted to retain the business while the other inactive spouse would be compensated from the division of other assets. This procedure is usually very complicated. For instance, transferring the interest from a partnership would comprise the deduction of debt and accumulated profits that result in massive tax deductions.
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Other issues
IRA, pension, or 401(k) are often involved when splitting assets in a divorce. A certified domestic relations order (ODRO) offers spouses the ability to share from a qualified account (which implies that tax-deferred, the spouse would be considered the owner). The benefit can only be received through the ODRO.
A popular aspect to audit when rich clients are consulting is the “kiddie tax”. The kiddie tax usually occurs when the investment income of a child is taxed as high as the parents’. This information should be provided by the spouses for proper estimation, planning, and payment of the kiddie tax in order to reduce its effect,
A popular occurrence when handling a divorce is the demand for restructuring the will and estate. The popular items that change in a divorce proceeding are the beneficiaries of life insurance, property ownership, custody, and trustee.
Start over again
Several tax elements must be considered when undergoing a divorce. However, this article has reviewed a couple of popular items. The initial step is a complete review of the asset of the client, income, and liabilities. Attorneys and CPAs are not the same and family attorneys don’t usually practice tax. Therefore, it is important to employ the services of a professional that can guarantee the best outcome for every party involved
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