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    #1

    Divorce settlements

    I am researching for a client the best way to handle the settlement she will get in divorce proceedings. I have read Pub. 504 and 575.

    1. From what I read in pub 504, if the spouse getting the divorce (let's just use she as getting the divorce and he as the one being divorced) if he signs over his portion of the house to her, there are no gains or losses to report. Her basis will be his adjusted basis and her adjusted basis. There is still a mortgage on the house which she wants him to finish paying for. This would not constitute alimony would it? It seems that as long as the divorce decree says it is not to be considered alimony it would not be.
    2. She will get half of what is in his retirement account. From what I read in pub 575 page 29, she can choose to roll over this to an IRA of her own. If this is the case, this would be a non-taxable event also.
    3. He is retired military and gets a pension which she will get half of as long as he is alive. This will be taxable income to her.
    4. If he pays her alimony, this will also be taxable income to her.

    I want to be able to give her the right information about these possible taxable situations for her. So I appreciate your suggestions or advice.

    Thanks

    Linda, EA
    Tags: None
    #2
    i have much respect for your opinion, in reading all your posts for some years. but, I believe you are right on all points except alimony. I think the judge is the one that determines alimony, (not that she wants spouse to finish the mortgage payments).

    Comment

      #3
      pub 504

      First, thanks taxmom34 for the kind words. Even though I have been doing this for a very long time, when we work alone in our office, we need someone to bounce ideas around with and this board is so helpful.

      This is a quote from Pub 504 page 15:
      Payments designated as not alimony.
      You and your spouse can designate that otherwise qualifying payments are not alimony. You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous
      written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order.Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. The copy must be attached each year the designation applies.

      So would that not mean that if it is in the divorce decree and they both agree that the payments made on the mortgage would not be considered alimony. I guess I mean it would be a possibility if both parties agreed on it. or am I reading that wrong or it applies to something else.

      Linda, EA

      Comment

        #4
        Home

        I just want to share the experience I recently had with a divorced client who got half of the residence from spouse as settlement, then sold the house and was stuck with the gain to the extend it exceeded $250,000. Your client might not want to sell the home, or a gain over $250,000 is not an issue. I agree with you that this is not a taxable event at the time of transfer. Once transferred, only $250,000 gain exclusion is available.

        In some cases it makes sense to not transfer the title yet and stipulate in the divorce decree what will happen upon the sale of the residence.

        Comment

          #5
          The judge must decree it in the divorce agreement and what the couple decide later isn't legally binding.
          If the judge deems the mortgage payments to be alimony, they are alimony. They could also be a continued financial redistribution of marital assets which isn't alimony. That's why the judge must decide.

          It's also important for the judge to make it legal because if reductions coincide with a child coming of age, the IRS will retroactively determine those "alimony" payments were actually child support and a large tax bill could be coming. A judge will take that into consideration and make sure it's done properly. Usually.

          Comment

            #6
            I have a new client going through a divorce. She was quite surprised with the tax due from maintenance payments. (She apparently has a VERY good attorney!). She also wants to know what could be taxable in the final settlement so she doesn't get another surprise when things get settled. I will check out the mentioned pubs.

            And on another note - same client - she has custody of their child, filed return, it was rejected as the child had been claimed on another return. State was automatically rejected because federal was. I had an apparent ID theft victim whose returns were rejected, but their state return was accepted when refiled separately. Should I try to refile her state return to see if it will be accepted or just go ahead with mailing? And does anyone know if NY will penalize me for a mail in return that was rejected?

            Comment

              #7
              Paper File

              Originally posted by Justataxguy View Post
              And on another note - same client - she has custody of their child, filed return, it was rejected as the child had been claimed on another return. State was automatically rejected because federal was. I had an apparent ID theft victim whose returns were rejected, but their state return was accepted when refiled separately. Should I try to refile her state return to see if it will be accepted or just go ahead with mailing? And does anyone know if NY will penalize me for a mail in return that was rejected?
              More than likely the other parent has claimed the child and if the other parent lives in the same state also on the state return.

              If you are satisfied that your client has the correct claim for the child then you will need to mail in the Federal and State returns. The IRS and State will then sort out who has the correct claim, i.e. your client will need to provide evidence of the child living with them more than 6 months etc. Also warn client this will not be a quick process if she is expecting a refund.

              Not sure about NY e-file penalty but can't see why there would be one in this case, same as there wouldn't be a Federal e-file penalty.

              Comment

                #8
                Just curious

                Originally posted by Justataxguy View Post
                I have a new client going through a divorce. She was quite surprised with the tax due from maintenance payments. (She apparently has a VERY good attorney!). She also wants to know what could be taxable in the final settlement so she doesn't get another surprise when things get settled.
                I am curious - was she awarded the maintenance in a trial, or did they just mediate this? If husband just agreed to something, I would tend to think he may be foolish, generous, trying to avoid the horrific legal process, or have a lazy attorney, more than she has a good one.

                I just hear stuff all the time about "I got screwed in my divorce" as if a Judge was unfair, when it seems to me like no, you didn't even have a trial, you just didn't do your homework and agreed to something you regret now because you were in a hurry.

                It's so comical to hear a client who gets $7500 a month in alimony complain that her boyfriend can't get finished with his divorce because that witch he's married to wants alimony.

                I realize this is totally off track, but inquiry minds want to know... and we have time for nosey questions now, right?
                If you loan someone $20 and never see them again, it was probably worth it.

                Comment

                  #9
                  Originally posted by RitaB View Post
                  I am curious - was she awarded the maintenance in a trial, or did they just mediate this? If husband just agreed to something, I would tend to think he may be foolish, generous, trying to avoid the horrific legal process, or have a lazy attorney, more than she has a good one.
                  Client provided court papers, the original and the revision which increased both maintenance and child support.

                  Comment

                    #10
                    Still nosey

                    Originally posted by Justataxguy View Post
                    Client provided court papers, the original and the revision which increased both maintenance and child support.
                    Do you know if she had the same attorney for both the original and revision?
                    If you loan someone $20 and never see them again, it was probably worth it.

                    Comment

                      #11
                      Originally posted by RitaB View Post
                      Do you know if she had the same attorney for both the original and revision?
                      Yes she did.

                      Comment

                        #12
                        Here's a pretty good article that discusses the issue of maintenance (aka alimony):

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                        http://www.mnbar.org/docs/default-source/sections/top-10-spousal-maintenance-tax-rules.pdf

                        Comment

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