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