Divorce involves the division of all marital assets and many other financial issues. Many tax laws come into play during a divorce, so beware of the following tax problems before, during, and after your divorce.
The transfer of property from one person to another is often a taxable event. Fortunately, transfers made to a spouse or former spouse incident to a divorce are not taxable in most cases.
Transfers between spouse or formers spouse are presumed to be made incident to the end of your marriage if they are made pursuant to your divorce or separation instrument and occur within six years of the date your marriage ends.
Marital debts must also be apportioned among the spouses. If you have IRS tax debt from a joint return, one spouse may decide to accept this debt during your divorce negotiations.
Keep in mind that the IRS may still consider both spouses to be jointly and severally liable for the tax debt, regardless of what your separation agreement says. This means that the IRS may come after either spouse for the full amount owed.
If you want relief from marital tax debt, you should consult a tax attorney to see if you qualify for any of the three types of innocent spouse relief.
Alimony and Child Support
Under current law, neither child support nor alimony may be deducted from the income of the payor. Prior law allowed alimony to be deducted and included in the income of the recipient.
If you have an alimony agreement entered into before 2019, you may still qualify for treatment under prior law.
Qualified Domestic Relations Orders
A qualified retirement account may be one of the most valuable assets in the marital estate. However, these assets generally consist of pre-tax dollars. If your spouse gives you half of their 401(k), this could trigger a taxable event, causing you to owe taxes and early withdrawal penalties on the full amount.
You can avoid this issue by using a Qualified Domestic Relations Order (QDRO). You won’t be subject to the 10% early withdrawal penalty. You could access the money right away and pay taxes on it, but you also have the option to roll it over into your own retirement account.
Contact a tax attorney if you have tax debt from a prior marriage or other divorce-related tax problems.
Get help with your divorce tax problems by calling The Gartzman Law Firm at (770) 939-7710. We can listen to your concerns and help you find the best tax resolution strategy for your case.