Tax Implications of a Divorce

South Florida Family and Tax Law Attorneys¹

Generally, property transferred between spouses during marriage or at the time of the divorce settlement does not result in the imposition of income taxes to either spouse.  Of course, there are exceptions.

Alimony is deductible by the payer and including in the income of the recipient.  Alimony includes certain payments pursuant to a divorce or separation instrument and does not include voluntary payments not made pursuant to such an instrument.  The IRS has specifically defined “divorce or separation instrument” for the purposes of determining whether a payment qualifies as alimony.  Child support is not alimony and is therefore not deductible by the payer.  Our attorneys can assist you with ensuring that alimony payments meet IRS requirements to be deductible by the payer.

A qualified domestic relations order (QDRO) permits a court to distribute part or all of a spouse’s qualified retirement plan (i.e. a pension or profit-sharing plan) to someone other than the participating spouse, such as a dependent child or to the other spouse or former spouse.  Benefits paid under a QDRO to a dependent child are generally treated as paid to the participant while benefits paid under a QDRO to the plan participant’s spouse or former spouse are generally treated as paid to the spouse or former spouse and included in their income.  There are additional rules governing the tax treatment of payments pursuant to a QDRO when the participant contributed to the retirement plan or if a lump-sum distribution is made. Moreover, the recipient of a payment pursuant to a QDRO may be eligible to rollover such payment into an IRA or other qualified retirement plan tax free.

Though the transfer of property between spouses or former spouses pursuant to a divorce generally does not result in the recognition of gain or loss, there are times when the parties may be required to file a gift tax return or recognize gain or loss if some or all of the property is sold and proceeds are divided between the parties.  One of the more notable exceptions to the nonrecognition of gain or loss rule occurs if one of the parties is a nonresident alien.

Of course, many other tax rules may come into play during a divorce including tax implications for transferring or dividing IRAs, health savings accounts (HSAs), Archer medical savings accounts (MSAs), and certain installment obligations. Further, though Florida is not a community property state, parties meeting residency requirements of a community property state should be mindful of additional tax implications which impose special rules for determining each party’s income.

Our South Florida divorce attorneys are experienced and highly skilled lawyers who possess backgrounds in finance, accounting and tax law. Our attorneys have handled complex cases involving the division of substantial marital estates, comprised of the following:  investment real estate, business interests, stocks, stock options, bonds, annuities, and pensions. Contact us today.

¹ This discussion of tax implications is intended to highlight some tax issues that arise during a divorce.  It is not intended to be, nor is it, tax advice that you can rely on-as every person's situation or divorce case is different. We advise you to seek the opinion of your accountant or  schedule a consultation with our attorneys to discuss the facts of your particular divorce case in order to determine its tax implications. The Treasury Department, pursuant to Circular 230, requires that we disclose to and inform you, that unless expressly stated otherwise, nothing contained in this communication was intended or written to be used, can be used, or may be relied upon by anyone, for the purpose of: (i) avoiding penalties that may be imposed under the Internal Revenue Code of 1986, as amended, or other applicable tax law; or (ii) promoting, marketing, or recommending any Federal tax transaction(s) or other matter.