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The role of taxes in divorce and property division

On Behalf of | Dec 14, 2020 | Family Law

Dividing up one’s marital assets can be a long and emotional process, and it is not uncommon for people in Texas to make decisions based on feelings rather than finances. While this might seem reasonable in the moment, it often results in unintended financial consequences that could have been avoided. As such, paying attention to tax implications associated with marital assets is a must during divorce.

Retirement accounts are like 401(k)s can prove problematic when it comes to taxes. For example, if a divorcing couple decides to split the money in a 401(k), they might go about it by directly withdrawing some of the funds for one of the spouses — but this leads to a tax withholding of a whopping 20%. Early withdrawal can net a 10% penalty, too. A more reasonable approach is to create a qualified domestic relations order. A QDRO allows couples to roll funds into different accounts without taking a tax hit.

Other assets like stocks or even the family home can have unanticipated tax consequences. If one spouse chooses to take a $100 stock over $100 cash in a joint account, he or she could end up with a much different amount of money if capital gains taxes come into play. Keeping the home is also tricky when it comes to taxes because there are a number of factors that might influence the overall value of the home, including when the home was purchased and whether one spouse maintained a home office.

Considering taxes during divorce is important, but it can be difficult. Couples are already dealing with any number of endless decisions, such as how to divide child custody and whether alimony is appropriate. Having the right guidance during this process can be key, which is why many people in Texas turn to experienced family law attorneys for support.