The Effects of Taxes and Inflation in Divorce
Key Points
  • Tax liabilities in divorce can put both spouses in the poorhouse for a little while.
  • If there are audits on your tax returns when you were married, both spouses are liable for any taxes.
  • It is important to talk to a financial planner or tax professional to make sure the impact of taxes or value of investments do not cost you in the divorce settlement.

A divorce financial planner or tax accountant can reduce the total taxes a spouse pays during separation and after divorce. The spouses can share this money (and both should remember that their divorce will make them poorer for a while). Both spouses are liable for taxes due as a result of audits on joint returns, so it is in their best interest to work together and minimize possible tax liabilities.

Disregarding the impact of taxes in a divorce settlement can be costly. After the divorce is final, a party may get taxed on the marital assets received in the settlement. The only way to know if a settlement is a fair deal is to determine the value of the investments on an after-tax basis. A tax professional can advise about the impact of any proposed property division.

At the same time, sometime people forget about the effects of Inflation, which erodes buying power. A college education or retirement years in the future can be profoundly affected by inflation. The Rule of 72 means that prices double in 24 years (72/3=24) when inflation in 3 percent and at 5% inflation double in 14.4 years (72/5=14.4).

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Suggested Reading
Divorce & Money: How to Make the Best Financial Decisions
This book is a practical guide to evaluating assets during divorce. It explains how to determine the real value of marital property including houses, businesses, retirement plans and investments and how to negotiate a settlement that is fair to both sides.

Authors: Violet Woodhouse & Dale Fetherling

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