The decisions made during a Texas divorce can significantly impact the tax bill paid by both individuals. To make more informed decisions that minimize tax impact, here are three critical decisions that must be made during the process.
1. The marital home
During a divorce, couples must decide what to do with the marital home. One option is to sell the house and divide the proceeds between the two individuals. Another option is to buy out the other’s interest in the home. If neither of these options is feasible, one individual may remain in the home, and the other may receive other assets of equal value.
There are tax implications to each of these options. Any capital gain on the sale will be taxed if you sell the home. If you buy out the other’s interest in the house, there may be gift tax implications. And if one of you remains in the home, there could be depreciation recapture tax implications.
2. Retirement accounts
Tax implications on retirement accounts are somewhat similar to dividing the marital home. If you decide to separate your accounts equally, each individual will pay taxes on their respective account when they withdraw the funds. If one individual keeps all of the retirement assets, they will pay taxes on the entire account when withdrawing funds.
3. Taxes owed on a divorce settlement
Often, when a couple divorces, they must pay taxes on the assets and income transferred between them. This is known as the “taxes owed on a divorce settlement.” The taxes are due in the year in which the transfer occurs.
There are a few ways to minimize or avoid this tax liability. One way is to structure the divorce settlement so that the spouse who is in a higher tax bracket pays the taxes. Another way is using a qualified domestic relations order to transfer assets between spouses.
Besides your children, asset division is the most important part of a divorce. By understanding the implications of taxes, you can make sure that you are protecting yourself during this difficult time.