If you are currently going through a divorce, or know that a divorce may be in your future, you may be tempted to take the first settlement that comes along just to make the matter go away. Unfortunately, doing so may be one of the worst things that you can do. Not only could signing the wrong settlement affect your immediate financial future, but it may also have negative tax ramifications. Understanding how you may be impacted may make you look at your settlement a little differently.
Understand The Difference Between Liquid And Non-Liquid Assets
All assets have value, but how liquid are they? This is an important question to ask yourself when you are in the midst of agreeing to a settlement. While you may want to keep the house, furnishings, and your car, you will also need cash to pay the bills when everything is said and done. This means that you will also need access to assets that are more liquid, such as cash.
When determining the liquidity of an asset, you have to assess how quickly you would be able to access cash from the asset without damaging the value of the item. Some examples of liquid assets are:
- Bank accounts
- Certificates of deposits
- Stocks, and bond
- Annuity payments
- Court settlements, and more
Even within these categories, some assets can be more liquid than others. Stocks and bonds, for example, are only as liquid as the market in which they will be sold. They will vary in price from one day to the next, and selling them can literally affect the price and other shares that you may choose to hold.
Non-liquid assets are things such as your home, jewelry, automobiles, as well as various types of collectibles. While all of these things have value, selling them quickly will often affect their value.
When negotiating and agreeing to a settlement, you need to ensure that you have a good balance of both liquid, as well non-liquid assets. This will allow you to not only meet your immediate financial needs, but will allow you to meet emergency situations which may occur during the years to come.
Know The Impact That Taxes May Have On Your Settlement
One of the few things in life that is guaranteed is taxes, and your divorce settlement will not be an exception. If you accept an asset that you are planning to sell, you will need to know whether it is worth more or less than what it originally costs. That is because any assets that are sold for a profit will generate a capital gain, which you will have to report as taxable income. The problem is that it is often taxed at a much higher rate than your ordinary income.
If you sell the asset for less than you paid for it, you will generate a capital loss. This often works in your favor, as this type of loss can often serve as a tax deduction which will lower your taxable income. There are special IRS tax rules that apply to the sale of a home that has been your primary residence. Gains and losses both have to be considered for any assets that you agree to accept as a part of your divorce settlement.
To ensure that any settlement that you sign is in your best interest, you should have the settlement reviewed by your divorce attorney, as well as by a financial planner and a tax professional. Each of these professional will be able to give you vital information in their area of expertise. This will not only protect you now, but may protect you for years to come.
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