Cindy Allen & Associates PLLC

Phone: 405-310-8673

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The importance of divorce settlement tax planning

Divorcing couples in Oklahoma often hope to keep conflict to a minimum and get through the process as quickly as possible, but failing to take changing tax laws into consideration can sometimes lead to significant tax exposure in the future. Spousal support is often a particularly contentious subject during divorce negotiations, and spouses who could be required to make these payments may offer to give up marital assets such as stocks, bonds, artwork or real estate in return for a clean break.

While spouses may consider receiving these assets upfront to be a more attractive option than the prospect of possibly having to hound their former husbands or wives to make good on their spousal support obligations, changes in tax laws could lead to significant capital gains tax bills if the assets concerned are subsequently sold. Capital gains tax is paid on the increase in the value of an asset between the date it was acquired and the date it is sold, and the amounts owed can be significant if the asset has been held for many years and has appreciated significantly.

In the past, the person transferring those assets would have been required to pay capital gains on the difference between their cost and their value at the time of transfer, but now the recipient is require to carry over the original owner's tax basis if the transfer is deemed incident to the divorce, such as the relinquishment of the right to receive alimony. Spouses hoping to avoid this pitfall and the resulting strife may wish to take proactive steps during divorce negotiations.

Family law attorneys may stay abreast of evolving tax laws, and they could suggest that property division agreements include a stipulation requiring the transferor to pay any capital gains taxes due if the assets concerned are ever sold. If this solution is not agreeable, attorneys may recommend that the assigned value of the assets be reduced according to the likely capital gains tax exposure.

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