Do You Have to Pay Taxes on a Divorce Settlement?

Everything You Need To Know About Divorce Settlement Taxes

( – Divorce carries a ton of financial implications for the separating couple, but taxes on a divorce settlement may not be the couple’s immediate concern. And in general, they don’t need to be.

Most property transfers or payments made through a divorce settlement these days are not subject to taxes, but there are some exemptions a separating couple should be aware of.

Alimony is No Longer Taxable

The tax law changes passed in 2017 made alimony a non-taxable issue, effective at the end of 2018. That means for divorces that occurred in 2018 and before that include alimony or separate maintenance, any payments remain a taxable transfer, but from 2019 forward, they are not, according to the Internal Revenue Service.

For divorce settlements that occurred in 2018 and earlier, the party who pays alimony or separate maintenance can claim that as a tax deduction and the party who receives the alimony must claim it as income.

If a divorce settlement agreement changes in 2019 or after, that could affect the tax status of the alimony payments. For example, if the payee asks for a reduction in alimony if income status changes, he or she may lose the tax deduction, and the receiver may no longer have to claim the alimony as income.

Property Received in a Settlement

Property and cash payouts made during a divorce are not considered taxable income. For example, if one spouse keeps the home, he or she does not need to count the value of the house or his or her share of the house as taxable income. However, if your state has a property tax, the receiving party will become responsible for that tax payment.

A stock or cash payout made during the divorce settlement also is not subject to income tax.

One consideration for property or stock transfers, the receiving party will be subject to any capital gain accrued both before and after the divorce, if applicable. For example, if the couple paid $100,000 for the house while married, it’s valued at $200,000 at the time of the divorce, and the receiving spouse sells it for $500,000 a few years later, the recipient is responsible for the capital gains tax on the $400,000 increase in value.

The IRS allows an exemption of $250,000 capital gain per person on a primary residence as long as the person has lived in the house for the two years prior to sale, so the spouse would be responsible for a capital gain of $150,000. The party who gave up the house would not be responsible for any portion of the gain that was made before the divorce.

If the couple decides to sell the house at the time of the divorce, the exemption from the capital gain would be $500,000 as each party can claim $250,000 in the exemption.

Stock sales are treated the same way, minus the exemption, as there are no exemptions on capital gains for stocks.

Other Types of Payments

Child support payments are not a taxable issue, so neither the payee nor receiver needs to report the payments on income taxes.

If a divorced spouse continues to pay medical bills for dependent children, whether the custodial parent or not, those are deductible medical expenses, though medical expenses are deductible only if they exceed 7.5 percent of your gross income, according to Kiplinger.

Other ongoing payments after the divorce, such as a car payment, house payment, property maintenance payment, or any other voluntary payment, also are not taxable.

A couple should discuss any tax implications of the divorce with their attorneys or accountants during the divorce negotiations to ensure there are no hidden tax liabilities that might come as a surprise after the divorce.

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