Taxation And Divorce Fall 2016

Our philosophy of representation is based on the belief that all clients are entitled to a soft landing after their divorce. A large part of a soft landing is having enough money to live a reasonably comfortable life.

What you earn and receive as support is a part of "having enough money." More important, is the amount of money that you get to keep. This brings us to the topic of taxation after divorce.

First of all, during your divorce, you may file a joint tax return if you are still married on the last day of the year. In some cases, a court will enter judgment on the first day of the next year if the parties appear in court during the last days of December.

It is important to consult with your accountant to make sure that there is an advantage to filing jointly. Under certain circumstances, it can be advantageous to file separately. Remember that spouses who file jointly are jointly and severally liable for any amounts due the IRS or Department of Revenue Services, whether or not it is their fault that the tax was not paid.

A well-written judgment or Separation Agreement should delineate which party is to take the exemptions for each child, the mortgage interest deduction, the property tax deduction, the medical expense deduction, and the child tax credit, if applicable.

When dividing property, it is essential that the parties understand the following: When property is transferred from one individual to a spouse or former spouse, and the transfer is "incident to a divorce" or "is related to the cessation of a marriage", no gain or loss is recognized on the transfer and there is no tax due to the federal or state government.

Generally, the term "incident to a divorce" is defined as a transfer which occurs within one year of the date on which the marriage ended. The term "related to the cessation of the marriage" means a transfer which is pursuant to a divorce or Separation Agreement and the transfer occurs within six years of the end of the marriage.1 For example, if the husband transfers the marital home to the wife five years after the couple is divorced and the transfer is related to "the cessation of the marriage", no tax is due. If the transfer occurs eight years after the divorce, the parties must convince the IRS that the transfer was "incident to the divorce."

When dividing retirement assets, it is important to note that retirement assets are made up of pre-tax dollars and the federal and state income tax must be paid if a party withdraws funds. That is why it is essential to roll-over all or portions of an IRA into a separate account set up by the receiving party rather than having the party receive a check made out to the party. When retirement is transferred from a defined benefit plan, it is necessary to have a Qualified Domestic Relations Order or QDRO prepared by a competent professional. When a party fills out a QDRO using a company form, it should be reviewed by a competent professional.

This summary is merely an overview which mentions important aspects of divorce taxation law. Each divorce is unique in many ways and it is important to consult with professionals who have your interest foremost on their minds. In order to have a soft landing, it is important for someone to have your back.


1See Arnold H. Rutkin, Sarah Stark Oldham, & Kathleen A. Hogan, Connecticut Family Law and Practice With Forms §56.8 (2010).