The effect of a settlement on various taxes can be very costly if not addressed thoroughly. Capital gains, income tax, and alimony are just a few of the areas that must be considered.

Capital gains taxes need to be analyzed when property is being divided. Capital gains refer to the fair market value of an asset minus its cost. For example, if someone pays $5 for a share of stock and it is now worth $25 he or she has a capital gain of $20. This applies to other assets such as real estate, mutual fund accounts and just about any investment that has appreciated in value.

It is a good idea to compare the capital gains liability of each spouse’s property, particularly that the property received does not have large capital gains as compared with the ex-spouse's property.

As an example, a spouse may be offered an investment account worth $150,000, but the cost basis is only $50,000. That means there is a gain of $100,000 that is paid at minimum long-term capital gains tax, and there could possibly be short-term gains as well, which are taxed at individual’s marginal tax rate.

In the case of a residence, the federal government eased the tax burden in 1997 by allowing a $250,000 capital gain exclusion per spouse if a party lives in the home for at least 2 of the past 5 years. If the home is to be sold and the gain is over $250,000, it may be wise to consider selling before the divorce to take advantage of the full $500,000 exemption. If a house was sold prior to 1997 and rolled over the capital gain to the existing home, the old rules apply.

> Income taxes are effected primarily by alimony payments and filing status. Alimony received is taxable as ordinary income, so, for example, a $50,000 payment received is actually worth $35,000 after taxes, assuming a 30% marginal state and federal tax bracket. On the other hand, the payer of alimony receives a tax deduction, so the same $50,000 payment actually costs the taxpayer $35,000 assuming the same tax bracket.

Filing status is an important decision after the divorce. A couple married on 12/31 of the tax year have the option of filing a joint return. For most couples, intact or separated, filing jointly is the best option as it could save considerable tax for both parties. A party divorced after 12/31 can file as head of household versus single, which can also save considerable tax dollars.