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Critical tax issues to consider during a Texas divorce

Tax issues for divorcing spouses to consider include liability for marital assets and alimony, potential deductions and methods of reducing tax liability.

Each year, thousands of people in Dallas navigate the complex and life-changing process of divorce. In 2012 alone, over 80,000 Texan couples completed divorces, according to the Texas Department of State Health Services. Unfortunately, many of these individuals may face significant financial setbacks as a result of divorce, and some of these may be tax related.

Given all of the financial, emotional and logistical issues that divorce presents, many spouses may find it difficult to think about tax matters during this process. However, it is critical for spouses to protect themselves financially by keeping the following issues in mind.

Liability for marital assets

During divorce, the distribution of assets between spouses does not automatically create additional tax liability for either person. However, spouses may have to pay added taxes if they liquidate any tax-deferred assets as part of their settlement. Spouses should note that, in the case of retirement accounts, the use of a qualified domestic relations order - which orders the payment of benefits to a non-employee spouse - can transfer ownership of assets without any early withdrawals.

When dividing complex property, spouses should also remember that long-term tax considerations might substantially change the worth of each asset. For example, if two retirement accounts have the same worth but one was funded pre-tax, it will have a much lower total value. Similarly, the capital gains tax may be markedly different for stocks with similar apparent values.

Taxation of financial support

In many divorces, one spouse will be ordered to pay spousal support or child support to the other. Child support has no effect on taxes; the paying spouse cannot deduct it and the recipient spouse does not pay taxes on it. The opposite is true for spousal maintenance or alimony, which is treated as part of the receiving spouse's taxable income. A paying spouse may claim a federal deduction for this expense if the following conditions are met:

· The spouses are divorced or have received a separation order.

· The spouse is making payments based on a court order or legal agreement, rather than voluntarily.

· The spouses are not living under the same roof or filing a joint tax return.

For paying spouses, the availability of deductions may make a larger alimony payment more desirable than a division of property that favors the economically disadvantaged spouse.

Deductions for dependents

Another tax issue that may arise during divorce is deciding which parent can claim the children as dependents. This issue is typically determined by the child custody agreement that parents observe; the adult who the children live with for more than half the year can claim them as dependents. However, divorced spouses also have the right to decide that the other parent will claim the children. If the other parent has higher income, this may reduce the total tax liability that each parent faces.

Limiting financial losses

Understanding the interplay between divorce and taxes can be challenging. Unfortunately, oversights or misconceptions can have huge financial consequences. As a result, during divorce, most people can benefit from working with an attorney who has an understanding of taxes and other complex financial issues that may arise.

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Bruce Turner

In addition to his law degree, Bruce Turner has a master's degree in tax law and is Board Certified in Commercial Real Estate Law by the Texas Board of Legal Specialization.

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Turner, Bruce E.
1603 Lyndon B. Johnson Freeway Suite 280
Dallas, TX 75234

Phone: 800-486-9553
Fax: 214-373-2570
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Bruce Turner with Bennett, Weston LaJone & Turner, P.C.

Attorney Bruce Turner is located in Dallas and represents people and businesses throughout DFW and the Metroplex, including Denton, Carrollton, Lewisville, Flower Mound, Farmers Branch, Irving, Las Colinas, Corinth, Highland Village, The Colony, Plano, Frisco, Allen, McKinney, Mesquite, Grand Prairie, Garland and Grapevine as well as Collin County, Denton County and Dallas County in Texas.

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