The tax-adjusted balance sheet represents the after-tax value of marital assets and liabilities as if the assets and liabilities of the marriage were liquidated and the remaining cash were distributed to each spouse. The tax-adjusted balance recognizes the embedded tax liability or savings in assets whose value at the date of divorce differs from its tax basis (usually its cost). The economic value of the assets is the fair market value of the asset, reduced by the associated deferred tax liability or increased by the deferred tax benefit (savings).
Many states now require an analysis of the tax consequences of a property settlement. Even if not required, preparation of an after-tax balance sheet is the best way of assuring that the parties fully understand the settlement, including the tax consequences. The analysis should include both the assets and the liabilities. Unfortunately, most states do not provide any guidance for the tax analysis.