To minimize the tax implications of asset division in The Colony, divorcing couples need to consider how tax laws will impact all of their decisions.
Most people do not have extensive knowledge of capital gains taxes, business taxes, or those surrounding retirement savings to plan to save assets effectively. Seeking advice from a financial advisor or seasoned property division attorney could be valuable, helping to preserve assets instead of paying extra taxes.
A capital gain is the difference between an asset’s purchase and sales prices. The gains on any asset are not taxable until they are realized, which happens when the asset is sold.
An equitable division of assets may require selling some assets with substantial capital gains. Even if the parties do not need to sell assets to divide them, one or both partners may need to sell assets to purchase homes or have money to live on after the divorce.
Many divorcing couples share a family home. They may sell it and divide the proceeds, or one spouse may get ownership of the home. Either way, tax implications can be related to this asset division in The Colony. Federal law allows a capital gains exclusion of $250,000 for single filers and $500,000 if a couple sells the home while still legally married. Gains above this exclusion are taxable. Selling the home before finalizing the divorce can offer substantial tax savings if the house has grown in value by more than $250,000 since the couple purchased it.
Investment accounts also have capital gains considerations. The transfer of ownership by one spouse to another or from the community to one spouse during a divorce is not usually a taxable event. However, that transfer does not lead to a step up in value. When the receiving spouse sells them, they will owe capital gains tax based on the original purchase price.
Dividing retirement accounts adds another layer of tax complexity. For 401(k)s and similar retirement accounts, moving funds from one spouse’s account to the other without taxes is possible if the parties have a qualified domestic relations order (QDRO). A QDRO allows transfers without triggering early withdrawal penalties or immediate tax liabilities. Without a QDRO, withdrawing or transferring these funds could cause tax penalties and early withdrawal fees.
A person does not need a QDRO to transfer money to a spouse during a divorce. However, the transfer must occur as part of the divorce settlement to avoid taxes. Using these funds for anything other than the division agreement can result in taxes and early withdrawal penalties if the individual is under 59 ½ years old. Additionally, mishandling the transfer could lead to tax liability.
Dividing up a business always complicates a divorce. It is essential to understand that these complications go both ways—the division can impact individual income taxes and taxes the business may own.
The nature of the business’s ownership (sole proprietorship, partnership, incorporation) also influences the tax liabilities. Dividing these types of businesses often requires a valuation to determine each spouse’s portion.
Under the Tax Cuts and Jobs Act, alimony payments are neither deductible for the payer nor taxable for the recipient, so payment does not have direct tax implications. However, since the payor will theoretically be paying income tax on the money they use to pay alimony, there is an indirect tax impact.
Evaluating whether a one-time lump sum or monthly payment is better for the payor can help both parties achieve a fair settlement. Call a lawyer in The Colony today for more information on asset division and alimony tax implications.
Understanding the tax implications of asset division in The Colony is essential for anyone going through a divorce. It may require consulting a financial planner, tax advisor, or lawyer.
Our hardworking family attorneys could help you anticipate possible tax liabilities related to capital gains, retirement accounts, or business interests. This assists divorcing spouses in reaching a fair division of assets and supports long-term financial security for both parties.
Consult an experienced legal professional in The Colony to learn more about how asset division may affect your financial future.
Our Law Firm’s approach to your case is based on individual circumstances. Whether it is a simple negotiated settlement, or it requires an aggressive approach, we will protect and defend your best interests.
