On January 1, 2019, significant changes to the IRS tax code took effect as part of the Tax Cuts and Jobs Act of 2017. Some of these touch on family matters and may impact your yearly tax burden. For other Florida couples, however, it’s business as usual. If you have questions about what is taxable in your divorce settlement, or if you want to understand how to plan for taxes in your divorce, it is imperative you discuss with your tax professional. Orlando Family Team always has trusted tax professionals to recommend if you do not have one already.
Which parts of your divorce settlement are taxable?
Here, we review some of the major tax provisions that may affect your divorce settlement.
The most talked-about changes to the tax code concern alimony. For any divorce settlement executed on or after January 1, 2019, any amounts paid as alimony (also called separate maintenance or spousal maintenance) are no longer tax deductible for the person paying. Also, they will no longer be counted as income for the spouse receiving these payments. This rule means that alimony will be more expensive, insofar as taxes, for the person who pays alimony.
If you have a pre-2019 divorce settlement, the old rules still apply in terms of what is taxable. In other words, for pre-2019 agreements, the spouse paying alimony receives a tax deduction while the spouse who receives the payments must include alimony in their taxable income.
The IRS has several important rules that determine what counts as alimony:
- The spouses don’t file a joint tax return
- The payment must be made by cash, check, or money order
- The payments are made to a spouse or former spouse pursuant to a settlement agreement
- The settlement agreement doesn’t say the payments are for something besides alimony
- The spouses don’t live together if they’re divorced or legally separated
- The payments don’t continue after the death of the receiving spouse
The following payments are not considered alimony:
- Child support
- Noncash property settlements
- Payments that are considered part of a receiving spouse’s community property income
- Payments made to keep up the payer’s property
- Use of the paying spouse’s property
- Any voluntary payments that are not part of the settlement agreement
Property Settlements in a Florida Divorce
As part of equitable distribution, you and your spouse need to settle all issues involving marital property. When spouses transfer property from one to the other, incident to the divorce, there is generally no gain or loss recognized by the IRS. The same is true if the property is transferred to a former spouse if it’s incident to the divorce. In cases like these, the transfer is not taxable.
This rule covers real and personal property, tangible and intangible. “Incident to the divorce” means the transfer occurs within one year of the end of your marriage or is related to the end of your marriage. Further, the transfer is “related to the end of your marriage” if both of these conditions apply:
- The transfer is made under the original or modified divorce settlement
- The transfer occurs within six years of the end of your marriage
For most spouses, their largest marital asset is their home. Many spouses who jointly own a home decide it’s best to sell it and split the net proceeds. If you take this route, you have to report your share of any gain or loss on your taxes. However, you may be able to exclude up to $250,000 of gain on the sale of the house (or $500,000 if you file a joint tax return).
Spouses often claim a portion of the other’s retirement or pension income, and a qualified domestic relations order (QDRO) is used to divide those plans between them. The participant is the individual who owns the plan and must share it with the other spouse. Generally, benefits that are paid to a plan participant’s spouse or former spouse are counted as the recipient’s income.
The QDRO is an important document. It allows money to be withdrawn from the participant’s retirement account and given to the other spouse without the hefty tax penalties usually associated with early withdrawals. Therefore, having a properly drafted QDRO is essential to avoid some of the taxes that would otherwise come with this aspect of the divorce settlement.
Child support payments are neither tax deductible for the paying parent, nor counted as income for the receiving parent. Changes in the tax law eliminated the child dependency exemption through 2025, but doubled the child tax credit for children under age 17 from $1,000 to $2,000.
Why It’s Important To Have The Right Attorney to Find What Is Taxable in Your Divorce Settlement
The above items are only a few of the tax issues that routinely come up with divorce settlements. For more complicated matters, we can help you find a tax specialist to advise you. Regardless, you need a family law attorney who is experienced with the basics of tax law as it applies to divorce. Your attorney should also be familiar with the changes that went into effect in 2019.
A knowledgeable Florida family law attorney can also help draft your divorce settlement in a way that best protects your rights and minimizes taxes. For example, if you are the spouse receiving alimony, it’s critical that the payments be clearly identified as such in your settlement. You also want to make sure that property transfers between you and your spouse satisfy the IRS rules for tax-free treatment. Plus, an attorney can explain how a QDRO works and makes sure it is drafted properly to avoid any tax penalty. Finally, your Florida family law attorney can explain the tax changes made with respect to qualifying children.
Let Orlando Family Team Help With Your Divorce Settlement Tax Questions
Understanding these rules will not only help you anticipate your tax burden but will go far in ensuring you get the best agreement possible. If your spouse is requesting, for example, that you take action which will increase your taxes, we may be able to use that as leverage during negotiations.
Orlando Family Team is here to help answer your divorce settlement tax questions or point you in the direction of a tax professional. Give us a call today to get started.