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Tax issues in a divorce

Texas couples going through a divorce may find themselves dealing with unexpected tax issues. As a community property state, assets are split 50/50 when a couple divorces. In most states, assets are split according to equitable distribution, which means assets are split fairly according to the divorce court. However, property division can quickly evolve into a complex family law case in any state when high-dollar assets are involved.

According to Section 1041 of the Internal Revenue Code, most assets can be divided between divorcing couples without paying federal taxes on them. Under the tax-free rule, the ex-spouse who receives the asset also inherits its tax basis as well. These transfers can occur at any point during the divorce proceedings, and even afterward for a set period if the court or the divorce decree allows it.

The IRS also allows ordinary income assets to be transferred tax-free between divorcing spouses. The ex-spouse who ends up with the asset also ends up with the tax liabilities that go along with it. Retirement accounts, however, are not subject to the tax-free rule, which means an ex-spouse could potentially be taxed for money that their former spouse collects.

These types of property division and asset distribution issues can become very complicated. When a couple owns several assets, the potential for confusion is even greater. Items like stocks, business interests, and retirement accounts can easily cause disputes in and out of court, especially when large sums of money are involved. It's important for each party in a divorce to have a representative who can help protect their respective financial interests.

Source: Market Watch, "What's even worse than divorce? The taxes", Billy Bischoff, December 03, 2013

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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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