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Texas divorce: Where do taxes fit in the equation?

Wednesday, April 26, 2017

It may seem odd to think of a divorce as a financial transaction, considering the heavy emotional burden a separation can engender. But those going through Texas divorce can attest to the fact that many financial issues are wrapped up in ending a marriage. While everyone can be influenced by the effect of divorce on tax issues, it is particularly true for affluent couples.

It is important to note, first and foremost, that state law controls when it comes to splitting assets. Texas, for example, is a community property state, which means any assets accumulated during the course of the marriage should be evenly split in terms of value. Assets owned prior to the marriage typically revert to their original owners.

Generally speaking, marital assets including cash, can be divided without being subject to federal taxation, courtesy of the tax-free transfer rule. Any divorce-related transfer is covered by this rule, even after the divorce is finalized -- as long as it can be proved that such a transfer is incidental to the divorce. A major exception to the tax-free transfer rule is retirement accounts, because they are already considered tax-advantaged. While it is possible to relegate these funds to a tax-free bracket, it requires some doing to make it happen.

Obviously, the specifics of a Texas divorce as they relate to finances are of vital importance to both parties, but they can also be quite complicated. It may help to learn more about Texas laws as they pertain to the distribution of assets. Seeking support on the subject from financial professionals can also help to smooth the transition and allow both parties to move forward on a financially stable path.

Source: marketwatch.com, What's even worse than divorce? The taxes, Bill Bischoff, Dec. 3, 2013

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