Tax Considerations in Texas High-Asset Divorce Cases

 Posted on April 25, 2023 in Divorce

Divorce in Texas is a complex process that becomes even more complex when high-value assets are involved. In high-asset divorce cases, Texas couples and individuals must consider the tax implications associated with property division, spousal support, and child support.

There are various tax implications that come into play when you get a divorce in Texas, and these can have an impact on distribution of marital assets and other aspects of your case. This is why it is always important to consult a trusted Austin high-asset divorce attorney on such matters.

That being said, let’s discuss the tax considerations involved in a high-asset divorce case in Texas and a few strategies you can use to minimize tax liabilities.

Capital Gains Taxes

Capital gains taxes are taxes paid on the profits made from the sale of an asset. These taxes are an essential consideration in a high-asset divorce case involving assets such as real estate property, vehicles, etc.

When dividing such marital assets, spouses must consider the potential capital gains taxes they may incur.

Fortunately, Texas does not have a state income tax. This means that state residents do not have to pay any capital gains taxes on the profit of their assets or investments. However, you are subject to federal capital gains taxes, which are typically lower than your income tax rate.

If you plan to sell an asset during your divorce proceedings, you should factor in the potential federal capital gains taxes into your settlement negotiations.

Taxes & Fees for Early Withdrawal of Retirement Funds

Retirement funds, such as 401(k)s and IRAs, are also key assets that are commonly divided during a high-asset divorce in Texas. However, early withdrawals from these funds can result in significant taxes and penalties, because then the funds are treated as income.

In Texas, the penalty for early withdrawal of retirement funds is 10%, but there are also some additional fees charged by the fund administrator. Couples may also have to pay income tax on the funds they withdraw early, since pretax dollars are used to fund these retirement accounts.

You may want to consider alternative ways of dividing retirement funds during your Texas divorce, such as through a Qualified Domestic Relations Order (QDRO), which allows the transfer of retirement-specific assets during a divorce, without incurring penalties or taxes.

Hidden Offshore Assets

In some Texas high-asset divorce cases, it isn’t uncommon for one or both parties to have hidden offshore assets. While it is not illegal to have offshore assets such as bank accounts or property, it is illegal to not declare them and keep them hidden.

These hidden assets can be difficult to trace, but skilled professionals like forensic accountants and Austin high-asset divorce attorneys can help you trace them effectively through discovery tools like subpoenas and depositions.

They can also secure temporary restraining orders (TROs) to prevent your spouse from depleting accounts or encumbering property prior to settlement or final judgment. If hidden offshore assets are discovered, the owner may face significant fines and penalties.

This is why it is important to disclose all offshore assets during divorce proceedings, to avoid tax liabilities and legal consequences.

Strategies to Minimize Tax Liabilities

Apart from QDROs, advantageous payment structures, and forensic accounting, there are several other strategies individuals and couples can use to minimize tax liabilities during a high-asset divorce case in Texas.

For example, high-asset couples may consider utilizing a mediator instead of going to court to settle their divorce. Mediation can be far less expensive, more amicable, and quicker than litigation, and it may also result in a more fair and equitable distribution of marital assets.

Another popular strategy to minimize tax liability is to use trusts to transfer assets. Trusts can help reduce taxes and even protect assets from future creditors.

Couples may also want to consider deferring the sale of assets until after the divorce is finalized to minimize tax implications. 

Contact an Austin High-Asset Divorce Attorney Today

Tax considerations are an important aspect of any high-asset divorce in Texas. Spouses need to be aware of the potential tax liabilities involved in dividing marital assets such as real estate, retirement funds, and offshore assets.

By understanding the tax implications and utilizing appropriate strategies, you can minimize tax liabilities and achieve a more equitable outcome. It is always recommended that you seek the advice of a qualified Austin high-asset divorce attorney to navigate the complexities of high-asset divorce cases and their tax implications. Contact a Austin high-asset divorce attorney from Powers and Kerr, PLLC for personalized support. Call 512-610-6199 for a consultation. 

Sources:

https://www.ers.texas.gov/Contact-ERS/Additional-Resources/FAQs/Qualified-Domestic-Relations-Order-(QDRO)

https://texaslawhelp.org/article/temporary-orders-temporary-restraining-orders-tros