The taxes are filed for another year. Or, they’re on extension for another few months. Either way, the stress of April 15/18 is past, for a little while. Even though clauses like “The parties were instructed to obtain independent tax advice concerning any aspects of their settlement agreement” is included in many Property Settlement and Marital Agreements, a few basics of taxation should be known by everyone before settlement agreements are finalized. Only by knowing the basics can an individual know what extra tax advice is needed to finalize the divorce.
The purpose of this post is only to outline some informational publications issued by the IRS on specific issues, and not to provide tax advice that applies to any particular situation. After reviewing a general IRS Publication on a particular issue, a family law attorney should make sure the client obtains specific advice from a CPA to apply to his specific situation.
Some of the basic tax situations that apply to Marital Agreements and divorce include:
- Most divorce property divisions are not taxable. Even if an account or real property has been held solely in one party’s name, if that asset is being divided in a marital property agreement, it’s a non-taxable transfer to the receiving spouse so long as it meets the “incident to divorce” rules. No gain or loss is realized on the transfer to the ex-spouse, and the property passes with a carryover basis. Publication 504, “Divorced or Separated Individuals”.
- Most spousal maintenance awards are taxable to the recipient and deductible to the payor, unless the parties explicitly agree that the maintenance (alimony) is non-taxable. Taxable spousal maintenance does have to meet specific criteria in order to qualify for this tax treatment. Publication 504.
- Accounts on which a distribution is normally taxable—such as a distribution from an IRA or 401K account—can be divided between the parties (but not spent) without incurring tax, so long as the division is done correctly and incident to a divorce. Publications 504 and 575 “Pension and Annuity Income”
- Child support is almost never taxable to the recipient nor deductible by the payor.
- Even though a Decree makes an allocation of the dependency exemptions for the children, the parent claiming the exemption may still be required to provide a completed Form 8332, signed by the custodial parent along with his/ her tax return. Publication 501
- Sometimes a person who was legally married during an entire tax year can file using the Head of Household (HOH) status. Publication 501
- The IRS issues a specific publication covering certain aspects of community property (which is the law in Arizona). Publication 555
- The IRS issued a specific tax ruling in 2002 covering the division of stock option and non-qualified deferred compensation proceeds to a former spouse. (See, various Revenue Rulings that should be reviewed by a CPA or tax professional)
The IRS published an informational guide to various publications that will help divorcing individuals: