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Tax implications during asset distribution in a divorce

Whether a couple is together for a few years or decades, there are various important factors to consider and go over during the dissolution of their marriage. Married couples in Massachusetts going through a divorce may have some serious family law issues to get through. For most, property division is not only an important decision-making process but it is also a very difficult procedure to work through. It could also become very complex if the couple has numerous assets and marital property. Furthermore, how they distribute their property could also affect them in other ways down the line.

A recent article discussed the potential for tax issues following a divorce. Those that are well off and had significant property to divide could experience federal tax aspects. This makes it especially important for divorcing or separated couple to understand how to divide and transfer assets and property tax-free.

For the most part, assets can be transferred or divided between ex-spouses without any federal income or gift tax consequences. This treatment applies to transfers made post-divorce so long as they are made within one year after the date the divorce is finalized. Transfers could be made an additional six months after this one-year period so long as they are made pursuant to the divorce settlement or agreement.

Although some assets can be transferred and distributed without any tax implications, capital gain assets and tax-advantaged retirement accounts do not fall into this category. Because various assets are treated differently, divorcing couples should understand how taxes would be applied to any of these transfers. In some cases divorcing individuals could end up getting taxed on money that was transferred into their ex's account.

Those unsure whether an asset or property falls within this category should be sure to understand how state laws influence property division. In Massachusetts, equitable distribution governs, so their property is split evenly or in a fair manner. Gaining advice about their situation and how to handle property distribution could help avoid problematic tax situations. In addition, it could help protect their rights and interests.

Source: Market Watch, "What's even worse than divorce? The taxes," Bill Bischoff, Dec. 7, 2013

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