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Tax implications of divorce decisions are wise to consider

Navigating the process of divorce can be strenuous because of the financial and emotional components of this type of family law proceeding. One of the biggest areas of contention during a divorce in California is the financial assets. When divorcing couples focus on how to split their marital assets, they sometimes concentrate on making sure that their immediate needs are met but fail to think about how their decisions today may affect their finances in the long run.

It is important, for example, not to forget about a divorce settlement's tax implications. One spouse might have $100,000 in an individual retirement account, or IRA, which is taxable. Meanwhile, the other party might have the same amount of cash in another investment account that is also taxable.

In this situation, the IRA owner will end up paying taxes on the cash when the money is withdrawn. The other party, however, will have to pay at the capital gains tax rate on any gains when his or her investment assets are sold. In the end, the IRA owner typically pays more in taxes.

When deciding whether or not to keep an asset or give it to the other party in return for a different asset during a divorce, it is wise to consider the costs of the asset one chooses to keep -- both its ongoing maintenance costs and tax-related costs. This may have an impact on how financially healthy a person is years following the divorce. Two people getting a divorce in California have the right to fight for the settlement they desire while taking into consideration the other party's needs and desires.

Source: unionleader.com, "Money Sense: Financial mistakes to avoid during a divorce settlement", Marc Herbert, May 2, 2015

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