Associate andrew@owlawyers.com When Apples Don’t Equal Apples: Divorce, Division of Marital Assets, and Tax Consequences Andrew N. Speer Michelle May O’Neil Associate andrew@owlawyers.com Senior Shareholder michelle@owlawyers.com

Topics of Conversation Retirement Accounts and Pensions IRA’s 401k’s Pensions Property Mortgage Interest Property Taxes HELOCS Refinancing Businesses Long-Term Capital Gains NIIT Business Structures Qualified Business Income Deduction Spousal Support and Children Spousal Support Child Tax Credits Educational Accounts Child Care Credits

Dollar for Dollar Differences Real Estate Investment Property Stocks, Bonds, Etc. Options Bank Accounts Retirement Accounts

Retirement Accounts Traditional IRA’s Defined Contribution Plans Defined Benefit Plans

Bank Account or Retirement Account? Asset Bank Account (Cash) Traditional IRA Amount $600,000.00 Income Tax 31.01% (effective) (if liquidated) Penalties $60,000.00 End $353,940.00

Retirement Account Notes 10% Penalty To lower effective tax rate on disbursements prior to 59 and ½ years, consider taking out smaller disbursements over time.

401ks and Defined Contribution Plans 10% Penalty 20% Withholding Initial Distributions Difference from other retirement accounts is when the taxes are paid.

Bank Account or Pension? Asset Pension (Defined Benefit Plan) End Date Value (For ½ of the Pension) $600,000.00 Monthly Payment $2,500.00 Life Expectance 20 years Total End Principal Needed for Payments ($2,500.00 x 12 x 20) Annual Growth Rate 3% Required Present Day Capital $446,456.00 (bankrate.com for 10 years of 3% gains compounding annually to reach $600,000.00) Years to Grow Before Payment 10 years Notes The $2,500.00 would be taxed as income.

Notes on Pensions Defined contribution vs. defined benefit and liquidation. There is a $153,544.00 difference between cash and defined benefit plan. There is a $246,060.00 difference between cash and a defined contribution plan. Pensions are normally split. Therefore the pension in the prior example is worth $1,200,000.00. Recipients are taxed on the income they receive from the pension. Upon receipt they are typically taxed at a lower rate because they are retired. Cash today is better than cash tomorrow. Pensions default, reducing payments to pennies on the dollar. You could invest it yourself.

Mortgage Interest Rate Deductions Deduction amounts are lowered on new loans, not old loans. Under the TCJA, interest on loans valued at $750,000.00 and under may be deducted. Previously the deduction was for interest on loans of $1,000,000.00 or less. Be careful when refinancing. You may lose the $1,000,000.00 mortgage interest deduction. Consider alternatives.

Home Equity Lines of Credit Deductions are extremely limited. Previously these could be deducted, and permitted parties to produce large sums of cash. These were useful when dividing pensions and IRAs. Consider offsets to account for interest and taxes.

State and Local Property Tax Deductions These were previously deductible without restriction. Corporations can still deduct 100%. Persons and pass-throughs are restricted to deducting a maximum of $10,000.00. This $10,000.00 includes a person’s state income tax as well. Consider selling the house outright during the divorce, and claiming the proceeds as an exemption from $250,000.00 - $500,000.00. (26 IRC 121).

Business Structures The long-term capital gains rate is usually 15% (sometimes up to 20%). No more bracket jumping based on LTCG Don’t forget the NIIT of 3.8% The C-Corp tax rate is 21% Qualified Business Income Deduction (20%). Pass-throughs are usually preferable in the QBI range. Don’t forget state and local taxes.

Spousal Support Payors can no longer deduct payments. Payees can no longer claim payments as earned income. Be cautious when modifying grandfathered items. In 2025 the new tax brackets sunset. Taxes are based on percentages, but spousal support is typically a dollar amount. A party’s net income could decrease if support lasts longer than 6 years.

Children 529’s and Private Schools Child Tax Credit Head of Household Child and Dependent Care Credit

The End Contact us at: andrew@owlawyers.com michelle@owlawyers.com www.oneilattorneys.com