Tax on divorce settlement

[Opus 17 · Accepted solution]

Generally, money that is transferred between (ex)spouses as part of a divorce settlement—such as to equalize assets—is not taxable to the recipient and not deductible by the payer.  This is different than alimony, also called spousal maintenance, which is taxable (and deductible) unless the settlement specifies that it is not.  In some cases, a settlement might include an asset transfer and a lump sum of alimony instead of periodic payments—in that case the alimony will generally be taxable.

However, if the asset transfer includes a tax-advantaged retirement fund like a pension, annuity, IRA or 401(k), then the money will be taxed by the spouse when they withdraw it.  Such plans are always taxable on withdrawal because the money was not taxed when it was contributed.  If you receive IRA-type assets in a divorce, you may have several options on what to do with it, with different tax consequences.

[gunthr]

what about when you receive non-qualified stock options as settlement for the equity in the marital residence?  I received a ton of options, exercised half of them, need to sell the other half.  Is that considered income?  Because really; it is just the equalization of the marital assets - something I already owned.  

[arklily]

my ex used his retirement funds to set up an account in my name - I had to close that account to get the funds -- all of these monies were to pay final divorce settlement - then I had to pay taxes on those funds???

Can I get a refund of those taxes?

[JamesG1]

Are you referring to a qualified domestic relations order with the intent to equalize retirement funds and marital property?

If so, upon withdrawal, some portion of the retirement funds may be taxable because taxes had not been paid upon contribution to the retirement plan.

See IRS instructions for form 5329 page 4.

Yet you could be exempt from the Additional Tax on Early Distributions.

[Mercadalevans58]

I am 62 and will be receiving settlement from my x-spouse retirement account. I would like to take out a small portion of money. Will I only be

penalized 10%, and will I have to file long form tax’s next year. 

[VictoriaD75]

If you are over age 59 1/2, you will not be subject to the 10% tax penalty for early withdrawal of retirement distributions. However, the amount of your distribution will be included in income in the tax year in which it was received.

[Nwash9577]

Ex and her lawyers asked to settle out of court. She is a teacher of 18 years. I have no retirement. I was going after 50% of her pension. We were married for 18 years. She makes around 65k now. What's a reasonable settlement I should ask for, also I want the money up front so I can start my new life I was forced in?

[akrocks1969]

Hello. My ex-husband and I were divorced in April 2015. He stayed in the house, I moved out. Part of the divorce settlement was for him to pay me. $65,000. He has had trouble coming up with the money until now. He is selling the house and paying me my money from the proceeds. Will I have to pay taxes on this money? I have been told I will have to roll it into another house purchase within 6 months or I will to pay tax on it. Do I have to buy a house, or can I invest it something else? Thank you.

[eoneill3468]

I have a very similar  issue, did you receive an answer?

[Opus 17]

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@Nwash9577 wrote:

Ex and her lawyers asked to settle out of court. She is a teacher of 18 years. I have no retirement. I was going after 50% of her pension. We were married for 18 years. She makes around 65k now. What's a reasonable settlement I should ask for, also I want the money up front so I can start my new life I was forced in?

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We can't answer those kinds of specific questions.  Your attorney should be advising you. They know the laws of your state.  

[Opus 17]

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@akrocks1969 wrote:

Hello. My ex-husband and I were divorced in April 2015. He stayed in the house, I moved out. Part of the divorce settlement was for him to pay me. $65,000. He has had trouble coming up with the money until now. He is selling the house and paying me my money from the proceeds. Will I have to pay taxes on this money? I have been told I will have to roll it into another house purchase within 6 months or I will to pay tax on it. Do I have to buy a house, or can I invest it something else? Thank you.

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You are getting some very confused advice from other people.  There is no provision to reduce your tax by buying a new home, that was eliminated around 1999 or earlier.

In general, division of assets is not taxable to you or deductible by your ex.  However, selling a home can sometimes be taxable to the owners.

First, who owns the home?  If you signed a transfer deed when you divorced and it is only in your ex's name, then you have no tax consequences from the sale.  If your ex pays you $65,000 then it's not taxable to you no matter how your ex got it. 

If you still own the home jointly, you may be subject to capital gains tax when you sell.  Capital gains is the difference between the selling price and the amount you have invested in the home (the purchase price plus improvements).  If either you or your spouse has lived in the home for at least the last 2 years, then both of you qualify to use the capital gains exclusion even though you moved out.  You can exclude the first $250,000 of capital gains each, then any higher gains are subject to capital gains tax.  

Unless the home is worth substantially more than $500,000, it is unlikely you would owe any capital gains tax on your share of the sales profits.  But you would need to work with an accountant to be sure.  If you still co-own the home, your ex can't sell without your signature, so make sure that you get your ex's cooperation on the tax issues before you sign anything, while you still have leverage. 

[MAKE1]

I divorced in 2016. I left my ex our residence, at the time it had $40-50k in equity. For that I was to receive a lump sum of $15k. She did not have those funds so she pulled it out of her OPERs retirement in my name. Its been a few years but I am sure my attorney told me that it was not taxable but now I am receiving notice that I am being taxed on it. Is that taxable income? 

[VolvoGirl]

You are being taxed on it?  The retirement distribution is taxable.  But how is your name on her distribution?  Was part of her retirement account put into a separate account for you as a QDRO?  Then when you take it out it is taxable.  Whoever got the 1099R it is taxable.

[rkurth76]

If my ex takes money out of her 401k to try to pay me my portion of the equity in the home, instead of refinancing the house, is that taxable and, if so, will she pay the tax as she pulled it out of her 401k, or would I be responsible for the tax?  Thanks!