Divorce: How to Get It Right, and Get on with Your Life

If you don't consider the tax implications of dividing your property and signing joint returns, a seemingly fair settlement could become a grave injustice.

First, consult an accountant before you memorialize your divorce agreement in writing, especially if there are tax-sheltered accounts, investments, and businesses to divide. "I'm usually in a position of not knowing anything until after the divorce is final and I'm telling the client that he's going to be wiped out," says Ed Slott, a CPA in Rockville Center, New York.

Second, look at the after-tax values of every asset you're using to negotiate and not just the numbers that appear on your financial statements. Here's an example of how ignoring tax consequences can cost you dearly:

Marie and David purchased stock in XYZ Co. and ABC Co. during their marriage and the present holdings in each company are now $50,000. David agrees to take the XYZ stock while Marie takes the ABC stock, a seemingly equal split. After the divorce, David sells the XYZ stock, and remembers that it was purchased 20 years ago for just $10,000. He now owes $8,000 in capital gains taxes, reducing his share to $42,000. Marie then sells her ABC stock, which was purchased only 5 years ago for $60,000. She not only receives the full $50,000 in proceeds--she gets a $10,000 loss to write off on her income tax.

Third, always remember that alimony is taxable income. If you're the recipient, consider the government's share of your check when you're planning your budget.

Finally, use caution when signing a joint tax return with your spouse while your divorce is pending. "It depends on if you're married to a crook," says Violet Woodhouse, attorney, certified financial planner and author of "Divorce and Money," published by Nolo.com. Although the IRS recently tamed its "innocent spouse" rules governing liability of people who signed joint tax returns without knowledge of their spouse's financial shenanigans, you may still have to plead your case to an IRS auditor.

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