tax papersJust as there are tax benefits in a marriage, there are some tax consequences after a divorce.

Castle Rock family law attorneys know that the tax code isn’t designed to be punitive in this way – it simply is.

In order to minimize this impact, you need to hire an attorney who understands the tax implications and can therefore help you discern the best way to divide your assets between you and your soon-to-be-ex.

Colorado is what is known as an equitable distribution state, as opposed to a community property state.

In a community property state, all assets acquired during the marriage are split 50/50. What that means is that each spouse is entitled to half the community property, minus the liabilities. Whatever a spouse had or earned prior to the marriage would be considered off-limits.

By contrast, equitable distribution is decided by, essentially, “whatever is fair.” That often works out to a 50/50 split, but not always. It is more subjective approach, which makes having a good attorney all the more important.

With regard to federal income taxes, Section 1041 of the IRS code does allow former spouses to divide property without being subjected to a gift tax or additional income tax. So this is one plus. But you have to be careful that any post-divorce transfers occur either within a year after the end of the marriage or within six years, so long as it is made pursuant to the original divorce agreement. In other words, the government wants to make sure the transfer of assets is a part of your divorce, and not just your ex-spouse gifting your money or property.

The big exception to the tax-free transfer rule is your retirement account. This includes IRAs or employer-sponsored plans. There are a number of hoops you would have to jump through in order to get all or part of those balances transferred to you without paying taxes. That doesn’t mean you aren’t entitled to it or you shouldn’t do it – just that you need to be aware of the potential monetary penalties you may incur as a result.

Divorce is complicated and so is the tax code. We are here to help you make the decisions that make the most sense for you.