Tax implications of divorce

 Posted on August 22,2020 in Divorce

When couples in Texas decide to get divorced, they are frequently focused on dividing their marital assets equally. To make sure that the property division is equal, divorcing spouses should consider the potential tax consequences. Some assets may be subject to higher taxes, which may make them worth less than taking other assets instead.

Taxes and different types of retirement accounts

Many divorcing couples have retirement accounts that will need to be divided. However, the types of retirement accounts need to be considered when deciding how to divide them. For example, if a couple has both a Roth and a traditional IRA that are equal in account values, choosing to let each spouse keep one might seem to be equal. However, Roth IRAs are funded with post-tax dollars while traditional IRAs are funded with pre-tax dollars. This means that the spouse who takes the Roth IRA will receive the account's full value at the time that distributions are taken while the person receiving the traditional IRA will have to pay taxes on the amounts that are withdrawn.

Child-related credits

Paying attention to child-related credits is also important. While the dependency exemption is currently suspended, it will return by 2026. This exemption allows the claiming parent to take a $4,000 exemption per child to reduce his or her taxable income. Parents should also think about other child-related credits, including the child care credit, the earned income credit and the additional child tax credit. Together, these credits can decrease the amount of taxes that a parent might be forced to pay and increase the amount of his or her income tax refund.

There are many other potential tax impacts that could happen in divorce cases. People who are planning to get divorced might benefit from consulting with experienced family law attorneys and financial advisors about the potential tax implications of taking various types of assets. An attorney may work together with their client's financial advisor to help to protect the client's financial interests and to minimize the tax burdens that he or she might otherwise face.