There are many tax implications associated with a divorce. The greater and more complex the assets, the more complicated the tax implications can be. We routinely work with accountants in high-asset divorces, whether in a forensic capacity (to unravel, trace, and identify assets) and in a tax-planning capacity (when negotiating a settlement). Taxes can have significant impact on what a party actually receives from an agreed property settlement in divorce. Thus, they must be considered sooner rather than later. While nothing is a substitute for advice of a tax professional and every situation is different, here are some things to consider.
Though the actual settlement or agreement does not itself generate reportable taxable income, that does not mean that there are not tax implications which will follow because of the transfer. In other words, there will be tax implications later. Generally, a spouse assumes the transferring spouse’s adjusted basis in the property; however, this is not always the case and depends on the types of assets and how they are held. And, in high-asset cases, some
transfers may trigger income or gift taxes.
Generally, most retirement accounts are tax-free, but some may be taxed - especially when
they are paid out. Likewise, certain employment-related retirement accounts (such as 401ks) may be subject to immediate taxation upon transfer unless an appropriate Qualified Domestic Relations Order (QDRO) is entered by the court.
Alimony payments are no longer tax-deductible for the payer but are not reported as income by
the recipient. This does not apply to orders or agreements entered a few years ago. The
question is what is considered alimony or separate maintenance? There are certain
requirements which must be met for the payments to be considered alimony, and they may not be called alimony and still qualify.
Child support payments are not deductible by the payer nor are they taxable to the recipient. It is necessary to determine who is entitled to claim a child as a dependent. Regardless of where the child lives, the parties can execute certain forms and agreements which allow a
noncustodial parent to claim the deduction.
Actual transfers which are made as part of a divorce settlement agreement are themselves
usually free of income tax (not the tax implications but the transfer itself) but must be accomplished within one year of the dissolution of the marriage. In other words, no deductible
loss or taxable gain can be declared during that one year, though once that time has passed,
transfers by either party can be evaluated by the IRS.
This is just the tip of the iceberg when it comes to potential tax implications of a divorce. It is important to get the advice of an experienced divorce attorney and tax professional before making any agreement or assumptions about how to address these issues.