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Be sure to consider tax implications in property division

Few California residents would argue that divorce takes a financial toll on both parties. Not only is there less money coming in, but expenses will undoubtedly go up since the same income will most likely need to sustain two households. This makes the property division portion of the proceedings crucial as the parties go their separate ways.

One of the biggest financial pitfalls that many California residents make during this process is neglecting to consider the tax ramifications attached to certain assets. Couples who decide to sell their homes and split the proceeds during a divorce will do well to consider the tax issues that go along with the sale. Knowing what the potential taxes will be -- and whether there is a way to avoid them -- should be part of the discussions.

The same could be said for retirement accounts. If one party is going to receive a portion of the other's retirement account, it will be necessary to investigate how best to transfer those funds in order to avoid paying taxes. For IRAs, it might only be necessary to have the funds transferred directly from one IRA to another. If it is a 401K or 503B account, it will be necessary to obtain a Qualified Domestic Relations Order from the court, which the IRS requires in order to waive the taxes that would otherwise be due on a premature withdrawal.

These are just a couple of the tax issues that need to be considered during property division. As the parties work toward a divorce settlement, it would be a good idea to determine whether taxes will be an issue with each asset. The fewer financial surprises the parties encounter in the future, the higher the chances are that each of them will be able to move forward without sustaining a significant financial blow.

Source: The Huffington Post, "4 Hidden Tax Issues in Your Divorce", Stann Givens, June 13, 2016

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