How to Calculate a Divorce Settlement

By Beverly Bird

Negotiating a divorce settlement is a little like attending an all-you-can-eat buffet when you’re on a diet. Everything on the buffet is edible, and it all may look good, but certain items might not accommodate your long-term plans. Similarly, some assets you’ve spent your marriage accumulating might derail your finances in the days, months and years to come if you add them to your column when dividing marital property. A lawyer or tax professional can also assist to inform you of your best options.

Negotiating a divorce settlement is a little like attending an all-you-can-eat buffet when you’re on a diet. Everything on the buffet is edible, and it all may look good, but certain items might not accommodate your long-term plans. Similarly, some assets you’ve spent your marriage accumulating might derail your finances in the days, months and years to come if you add them to your column when dividing marital property. A lawyer or tax professional can also assist to inform you of your best options.

Step 1

Consider capital gains on any investment properties you're thinking of retaining. Capital gains taxes are paid on the difference in value between what you bought something for and what you sell it for. In divorce situations, your “bought for” date is not the date your spouse transfers ownership to you. It’s the date the two of you first acquired the asset. If you purchased a parcel of vacant land for $5,000 early in your marriage, and if you take it in the settlement and sell it for $50,000, you're only actually gaining $43,250. You'd pay capital gains tax, usually at the rate of 15 percent, on $45,000 of the money.

Divorce is never easy, but we can help. Learn More

Step 2

Assess your immediate cash needs. Retirement plans are often subject to their own taxes and penalties if you cash them in before age 59½. If you opt for a portion of your spouse’s 401k or IRA, and you need the cash now more than you need the eventual security, you might pay anywhere from a 10 to 20 percent tax penalty if you don't roll the money over into another retirement plan in your own name. This can potentially turn a $50,000 retirement benefit into one worth only $40,000.

Step 3

Gauge the income tax implications of support awards. Alimony is taxable to the spouse receiving it and tax-deductible to the spouse paying it. Therefore, a $30,000 alimony award is not really worth that much to you. If you pay income tax on it at the rate of 20 percent, it’s only actually worth $24,000 to you after taxes. Likewise, if you pay $30,000 per year in alimony to your spouse, it doesn't really cost you $30,000. If you're in the same tax bracket, you're only paying her $24,000 because you save the $6,000 you would have given to the IRS on that income.

Step 4

Subtract the tax liabilities of each asset you're taking in the settlement from its face value, then add the after-tax values of all the assets you're keeping. Do the same with the assets your spouse is retaining. If your settlement is equitable, both of your after-tax columns should come out reasonably equal.

Divorce is never easy, but we can help. Learn More
How to Price the Worth of Household Goods for a Divorce

References

Resources

Related articles

Things to Ask for in a Divorce Settlement

One of the more unfortunate aspects of divorce is that you must make major decisions regarding your future at a time when you may barely be able to think at all. Before you sit down to negotiate a settlement with your spouse, it's sometimes helpful to meet with family, friends or your attorney and allow them to be your voice of reason. Make a list of what you want from your divorce and honestly listen to the pros and cons of what might happen if you get them.

How to Receive Stocks as Inheritance

The Internal Revenue Service has specific rules that deal with how inherited property, such as stocks, is treated. Knowing your basis in the inherited stock can help you anticipate the tax implications of selling it, which allows you to time your sales to create the lowest resulting tax burden.

Financial Planning for Divorce

In addition to the emotional upheaval of divorce, parting ways with your spouse is probably going to turn your personal finances upside down. You can control the impact, however, with a little advance planning. Financial planning for divorce involves identifying what areas of your life are likely to change, then taking steps to adjust for them.

Get Divorced Online

Related articles

How to Estimate the Market Value of Assets in a Divorce

Judges and attorneys are predominantly concerned with the value of significant assets when a couple breaks up. You ...

How Is a Roth IRA Divided in a Divorce?

Dividing most retirement accounts in a divorce can be a major headache, but Roth IRAs are an exception. Unlike defined ...

How to Avoid IRA Early Withdrawal Penalties in a Divorce

Because IRAs are tax-deferred accounts until you retire and tap into them, it makes sense that if you take the money ...

Divorce & Nonqualified Annuity

A nonqualified annuity is an insurance contract purchased with after-tax dollars, and like any other asset, it may be ...

Browse by category