Big Life Change Ahead? Don’t Forget the Tax Consequences
When you have a big life decision, it usually means there are plenty of decisions to make. Maybe you’re thinking about selling your business, getting divorced, selling an investment property, retiring, or making another significant financial move. No matter which one it is, they all impact your financial situation. Taxes might not be the first thing on your mind, but should be part of the conversation.
A decision that looks financially beneficial on paper can have unexpected tax consequences that affect how much money you actually keep. That’s why it can be helpful to talk with financial experts before making a major financial decision.
Here are a few situations where a conversation with your tax professional could make a meaningful difference.
Selling a Business
Selling a business can be a major financial milestone, even if it’s something you didn’t necessarily plan. After years of building your company, you may be ready to retire or move on to something different. That’s completely okay. Remember, the sale price isn’t necessarily the amount you’ll walk away with.
Depending on how the business is structured and how the sale is completed, different portions of the transaction may have different tax implications. The timing of the sale can matter as well.
Example scenario:
Imagine you agree to sell your business for $1 million. It may be tempting to look at that $1 million and immediately start planning how you’ll use it. The taxable gain, the structure of the transaction, your basis in the business, and other factors can affect your actual profit after tax.
Selling Real Estate
Real estate transactions can also create tax consequences that aren’t always obvious at first. It can be incredibly confusing if you don’t know what to expect. Maybe you’re selling an investment property you’ve owned for years. Perhaps you’re selling a second home or interested in a commercial property.
Example scenario:
You purchased an investment property for $250,000 and eventually sell it for $500,000. It might seem like you’ve made $250,000. However, the tax calculation can be more complicated depending on improvements, depreciation, selling expenses, and other factors.
There may also be important considerations if you’re planning to reinvest the proceeds or purchase another property.
Before signing a sales agreement, consider asking your finance expert what the transaction could mean for your tax return. Knowing the potential tax consequences ahead of time can help you make a more informed financial decision.
Going Through a Divorce
Divorce involves emotional and financial decisions. It’s easy to see why taxes can be easily overlooked in the process.
Who will claim certain assets? What happens to a jointly owned property? How might selling the family home affect each spouse? What are the tax implications of transferring or dividing certain assets?
Example Scenario:
A couple may own a home together and decide to sell it as part of the divorce. The proceeds may be divided between them, but there may be tax considerations related to the sale and each person’s circumstances.
There can also be tax implications involving investments, retirement accounts, business interests, and other assets. Your attorney can help with the legal aspects of a divorce, while your CPA can help you understand the potential tax consequences of financial decisions you’re considering. Having both perspectives can be valuable before finalizing agreements.
Planning for Retirement
Retirement is another major life change where tax planning can make a difference.
You may be deciding when to leave your job, whether to sell a business, how to use retirement accounts, or when to begin taking certain types of income. It can all get confusing very quickly, and you have to be strategic.
Example Scenario:
Someone retiring at the end of the year might receive a large bonus or begin taking retirement distributions around the same time. Looking at each transaction individually may not tell the whole story. The combined income could have a different tax impact than expected. Financial experts can help you look at the bigger picture and consider how the timing of major financial events could affect your tax situation.
Talk to Your Flexkeeper Before Making A Big Financial Decision
One of the biggest mistakes people can make is waiting until tax season to ask about the tax consequences of a major transaction. By then, the transaction may already be complete, and some planning opportunities may no longer be available.
Bring someone with experience and a solid reputation earlier. Tell them what you’re considering and what assets or income may be involved. They can help you identify the tax questions you should consider before moving forward. Major life changes are complicated enough. Understanding the financial and tax side of the decision can help you move forward with greater confidence and fewer surprises.
Big life changes often come with big financial questions. Before you finalize a major transaction, take the time to understand how it could affect your taxes and overall financial picture.
If you’re considering selling a business, selling real estate, retiring, getting divorced, or making another major financial change, contact Flexkeeper. Our team can help you look at the financial and tax considerations before you make your next big move.