When people in Texas get a divorce, taxes may be one consideration when it comes to property division. However, because of the Tax Cuts and Jobs Act, there are some additional changes ahead that people should be aware of.
For divorces finalized in 2019 and later, recipients of alimony will no longer be taxed on the payment, and payers will no longer be able to deduct the amount. This could create issues with prenuptial agreements that deal with alimony payments, and it is unclear how courts will handle such an agreement. Another element of the tax reform law is that some businesses could be valuated at a higher rate. This may or may not be to a person's advantage depending on the situation.
Pensions and 401(k)s need to be divided using a document called a qualified domestic relations order. Without the QDRO, there could be taxes and penalties. People should also understand the value of assets including encumbrances. For example, a couple may have a brokerage account worth $1 million and a house with a mortgage that is paid off worth $500,000. The house might be a better asset to keep if there is a capital gain embedded in the brokerage account. Understanding this could be particularly important for the lower-earning spouse.
In general, unless there is a prenup, both spouses will be considered joint owners of most assets the couple has acquired since marriage because Texas is a community property state. In a high-asset divorce, this could mean complex negotiations. For example, if one owns a business or a business is jointly owned, they may need to decide whether one will buy out the other or if they will sell the business. Despite these complexities, it may still be possible to negotiate an agreement instead of going to litigation.