Divorce Tax questions.... no, not for me...

fingpilot · 08-27-2007, 05:53 PM

A friend is going thru a divorce. She has hung in there for many years.

Nonetheless, the time has come and her settlement offer is partly funded by her ex's IRA / 401K. The balance will be a check (with money borrowed from his inheirantence). She has not had any income for many years, and they always filed 'married / jointly'; farm losses offset income. Final date is mid-November.

Is settlement taxable? Will state taxes apply? Should her filing status be an issue? What should she expect this year / next year?

I know, she is looking for a tax guy, her attorney won't go there. But I was wondering about the PP brain trust opinion.

TIA.

berettafan · 08-27-2007, 06:06 PM

if her atty is not insisting she see a CPA BEFORE the agreement is finalized he is doing her a disservice.

fingpilot · 08-27-2007, 06:14 PM

Funny thing is, she has a CPA for the money management part, but he won't touch the tax issues. Geez.

Dueller · 08:00 PM

Diusclaimer: I am not a tax atty and not licensed in your jurisdiction.

That being said she does need to consult a tax atty or CPA before signing.

GENERALLY speaking any transfer of property from one spouse to another incident to a divorce is not a taxable event under federal laws (State tax laws generally follow in line with federal laws). HOWEVER, transfers from one spouse's IRA /401K, 403b etc (i.e., retirement accounts) are not usually taxable IF the money never hits her hands and goes straight from his IRA/401k into an IRA in her name. This is done thru a QDRO (Qualified Domestic Relations Order) by the divorce court. Your example does not contain enough info....if he is transferring from his IRA/401k directly to her it will likely be taxable if it is transferred directly to her and not into a retirement acct for her. However, if he liquidates it to pay a property settlement other than merely equitably dividing retirement accounts, HE may be liable for the taxes and penalties for his withdrawal depending on his age, income etc. She should also be cautioned against taking alimony in lieu of a property settlement as alimony is generally traxable to her and deductible by him.

As far as filing status, she will file as single for TY 2007 if the divorce is final by 12/31/07.

Bottom line...talk to an expert. Oh yeah...it is not unusual for a divorce lawyer to include language disclaiming any expertise on tax advice.

fingpilot · 08-28-2007, 12:05 AM

Thanks.... your idea was exactly as mine. I have an appointment for her in the morning with a Divorce Tax guy. Didn't know there was such a specialty.

berettafan · 08-28-2007, 03:39 AM

Quote:

Originally Posted by fingpilot

Funny thing is, she has a CPA for the money management part, but he won't touch the tax issues. Geez.

Not a good sign.

berettafan · 08-28-2007, 04:36 AM

'Divorce tax' is NOT terribly complex.

fingpilot · 08-28-2007, 01:00 PM

Quote:

Originally Posted by berettafan

Not a good sign.

The issues were that the Divorce attorney did not want to get involved, she is swamped with her divorce business. We have spent an hour with a Tax Atty in Vegas, and is exactly as surmised in here.

Thanks everyone!

berettafan · 08-28-2007, 01:08 PM

certainly understand atty not wanting to give tax advice but the CPA not wanting to handle the tax issues in the divorce does not inspire confidence. this is what i was referring to.

glad you got her pointed in the right direction though!

lots of money gets wasted in divorce agreements (that is to say given to Uncle Sam).

fingpilot · 08-28-2007, 01:16 PM

The CPA is her ex's CPA as well. I think he was reluctant to get into tax issues because of that. They already have an exclusivity and confidencialty agreement for the redistribution order.

berettafan · 08-28-2007, 05:31 PM

gotcha. all makes sense then.