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Ensure a fair financial settlement in a Hawaiian divorce

| Aug 22, 2020 | Divorce

You need to ensure that your financial matters are addressed when it comes to dissolving a marriage in Hawaii or any other state. While most couples understand the need for a fair distribution of financial assets, many do not consider the long-term consequences of the financial decisions they make while legally ending a marriage. Those consequences often include surprising tax complications that make family law cases more troubling for some as the years pass.

Tax implications complicate financial matters

How financial assets are divided during a divorce can have a significant impact on one or both ex-spouses. A financial asset might enjoy tax protections while another is a ticking taxation time bomb. IRA accounts are good examples. A Roth IRA has tax protections in place for future disbursements, which means more money during retirement. A similar standard IRA does not have tax protections and will trigger federal and state income or capital gains taxes.

A standard IRA is not taxed up front, and any future disbursements are taxed as income. That tax can be as much as 35% and greatly reduce the value of a prior divorce settlement. A Roth IRA pays the taxes up front and not down the road even after it has grown in value. If one party in a divorce winds up with a standard IRA and the other one a Roth IRA, the person with the Roth IRA winds up netting 100% of the value versus possibly only 65%.

Other effects on future finances

A divorce settlement can overlook the future tax implications of other decisions that can affect one’s future finances, including child custody and the tax credits that go with raising children in the home. The parent who holds the right to claim a dependency exemption due to child custody also obtains other significant federal and state tax benefits that could make an apparent divorce settlement downright unfair down the road.

Whether you are in the midst of a divorce or dealing with a similar matter in Hawaii, an experienced family law attorney can help you obtain the best possible outcome.