Tax Implications of Divorce for High Earners in Palm Beach County

Nobody walks down the aisle thinking about Schedule 1 of their tax return. But if your marriage is ending and your income sits comfortably in the higher brackets, taxes are about to become an unavoidable part of the conversation. So what actually changes on your tax return once the ink dries on a divorce decree, and where do high earners tend to get tripped up?

Alimony Isn’t the Tax Break It Used to Be

Here is the twist that catches a lot of people off guard. For years, the spouse paying alimony could deduct it, and the spouse receiving it had to report it as income. That changed for good under the Tax Cuts and Jobs Act. According to IRS Topic No. 452, alimony payments made under a divorce or separation instrument executed after December 31, 2018, are neither deductible by the payer nor taxable to the recipient. For a high earner writing a substantial monthly support check, that used to be a meaningful deduction. Now it simply is not, which changes the math on what a fair settlement number actually looks like.

Property Transfers Generally Move Tax-Free, But Read the Fine Print

Transferring assets between spouses as part of a divorce settlement generally does not trigger an immediate tax bill, since these transfers are typically treated as tax-free under federal law. That sounds like good news, and mostly it is. The catch is that the tax basis of the asset transfers along with it, meaning whoever ends up holding an appreciated asset, whether it is investment property, a stock portfolio, or a vacation home, will eventually owe tax on that built-in gain when they sell. Two accounts that look equal on paper, say a brokerage account and a retirement account of the same dollar value, can carry very different tax consequences down the road.

Watch These Areas Closely

A few specific issues tend to surface again and again in high earner divorces in Palm Beach County:

• The marital home, where capital gains exclusions work differently depending on whether one or both spouses remain on the deed and title after the sale
• Dividing retirement accounts, which generally requires a Qualified Domestic Relations Order to avoid triggering early withdrawal penalties
• Business interests, where valuation methods can significantly shift what each spouse actually walks away with after taxes
• Investment portfolios with embedded capital gains that are not obvious just from looking at the account balance

Ignoring any one of these can mean signing off on a settlement that looks fair on paper but leaves one spouse with a far larger future tax bill than the other.

Reach Out and Let’s Talk Numbers Before You Sign Anything

A divorce settlement built without tax planning in mind can quietly cost a high earner far more than expected once the returns are filed the following spring. Before finalizing anything, it is worth having the tax side of your case reviewed alongside the legal side. Our Boca Raton divorce attorneys at Schwartz | White are ready to help you look at the full financial picture. Give our office a call and let’s get started.

Source:

irs.gov/taxtopics/tc452