When considering assets acquired during the course of marriage, people tend to think of wages they've earned, retirement assets accrued, and items purchased over the years. They almost never consider a loss as a potential item of value that should be allocated in divorce. It is the job of a thorough and detail-oriented divorce attorney to consider this possibility and ensure that each spouse receives their fair share.
A loss carryforward can lead to big tax savings, so it is a valuable asset. Let's take a look at why you need to consider loss carryforwards as part of your divorce settlement.
What is a Loss Carryforward?
When you make money on an investment and then sell that investment, you pay tax on the amount you have gained. You might pay capital gains tax or it could be taxed as income, depending on the investment.
When you lose money on an investment or in your business, you have the opportunity to deduct the loss from your taxable income or gains so that you owe less in state and federal taxes. So in that way, a loss incurred at one time has value for you in the future. Our tax laws allow you to use that loss to offset income in the same year, or to carry it over and use it in future years. When you carry over a loss from one year to the future, that is a loss carryforward. The tax savings make it valuable. Yet this is an "asset" that is often overlooked in divorce. It should be allocated among spouses just like other community property in a California divorce. The same holds true for net operating losses from a business.
Allocating Loss in California Divorce
While we tend to equate loss with debt, they are the complete opposite when you consider tax implications. A loss can be used to decrease the amount of income you pay tax on, and therefore, it saves you money and that makes the loss valuable.
When the loss is associated with property treated as community property under California law, then generally the loss carryforward would be allocated equally between spouses. In some cases, if spouses filed separate tax returns, if the property was acquired before marriage, or if the issues were addressed in a pre- or postnuptial agreement, then one spouse might be entitled to all or a greater share of the loss.
Losses to consider include:
- Capital losses
- S Corporation losses
- Investment interest expense carryforwards
- Net operating losses
In addition, if there are carryforwards of charitable contributions, those need to be accounted for and allocated as well.
Issues to Consider Regarding Loss Carryforwards in Divorce
Losses can be carried forward on an indefinite basis under current tax laws, and depending on the amount of losses and future income to be offset, these losses can amount to thousands of dollars in tax savings over the course of several years.
However, to understand the value of loss carryforwards and how to fairly allocate the value in a divorce settlement it is vitally important to work with a knowledgeable accountant as well as a financially savvy attorney. Tax issues become very complicated after a divorce when couples can no longer file joint returns, and there are restrictions on the use of loss carryforwards that are important to be aware of when planning for and using these losses.
Custody Queens: Protecting Your Interests
Consider how the details fit into the big picture. Losses from investments and businesses, excess charitable contributions, and other tax carryforwards are just a small part of the financial picture that needs to be addressed in a California divorce. You can trust the team at Custody Queens, our Certified Family Law Specialists, to ensure that you receive your rightful share in a divorce, including properly allocating loss carryforwards. We pay attention to the details while keeping mindful of the overall scheme so that you will be positioned for move forward after your divorce. Schedule a confidential consultation with our team today to learn more.
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