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Tax consequences deserve consideration in divorce

North Carolina is an equitable distribution state, so the net assets of a divorcing couple are split between the two by what seems fair to the court. If the couple should desire, they may propose a distribution for the court to accept or reject. Regardless of which method is used to divide the assets, there are some federal tax laws that are applied to either situation.

Generally, assets can be split between ex-spouses with no tax consequences. The receiving spouse takes over the tax basis and the holding period of the asset. The timing of the transfers can vary anywhere from before the divorce all the way up to six years following the divorce as long as the distribution is being made as part of the terms of the divorce.

Non-capital assets are now receiving the same treatment as capital assets. It used to be that in a transfer of ordinary income assets, tax was due on the difference between the fair market value and the basis at the time of the transfer. Now, however, tax is due on these assets only when the asset is sold or converted to cash. Most tax-advantaged retirement accounts, however, are subject to different rules, and it is difficult to distribute these types of assets without tax consequences.

With federal tax laws changing frequently, it may be difficult to stay current on what tax consequences need to be taken into consideration when a couple divorces. An attorney who is knowledgeable in family law may be able to provide input on current federal tax and state tax considerations in connection with the negotiation of an equitable property division agreement.

Source: Market Watch, "What’s even worse than divorce? The taxes", Bill Bischoff, December 03, 2013

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