Ask The Taxgirl: Marital Property/Divorce

Taxpayer asks:

… there’s the whining and nashing of teeth (and nerves).

I’m loopy trying to make sense of the IRS publications on divorce proceeds.

Basically, I was divorced in California (community property state) and judge split it down the middle essentially. He paid me the amount of money indicated in the divorce decree (without selling the home, he stayed in it). There was no alimony granted so this is just the funds from property division. The divorce itself didn’t finalize until I’d moved out for at least a year plus so no monies were mixing (separate vs. community funds topics), etc.

So come tax day… the IRS publications are describing all types of scenarios that have nothing to do with a semi-straightforward, hair-pulling divorce… I got paid and I haven’t a clue if I’m now paying taxes on money from stuff that we had jointly owned for several years – OR NOT.

I’d read around the internet and found articles suggesting this wasn’t taxable income but the IRS pubs have me offering limbs to be severed just to relieve the confusion and stress. I’m now frantically searching the web with the IRS shadow of April 15th looming over me and I’ve finished the bottle of wine that was keeping my nerves settled enough to stay in my chair Googling for answers.

Any ideas? I’m mentaling juggling a $100,000 (most of which paid off all of my debts, divorce fees, etc.) so you can imagine the freak-out going on. It’s amazing what a cheap bottle of wine can do (I’m anti-meds and drugs, so it’s something…).

Thanks for any help (even after the fact as some other gal going through a divorce may find this helpful)!

Taxgirl says:

Divorce can be tricky. So, I’ll start off by saying that I’m giving you some general advice but you may need to consult with a family lawyer who is well-versed in tax law.

The general rule is that there are no federal tax consequences for a lump sum split of marital property.

There are some exceptions. Chief among them: retirement assets, income-producing property, or sales of capital assets. Here’s the easy way to think of those things: if they would have been taxable without the divorce, they probably still are. So, to the extent that you pull funds from a retirement account or sell anything to satisfy a divorce settlement, there is likely a tax consequence.

And, this being tax law, there are some exceptions to the exceptions. On the plus side, these are “good” exceptions. In some cases (such as the sale of a family home which had been subject to the first time homebuyers credit), there are some exceptions to penalties – so check with your tax pro if you think you might be affected by those.

But it sounds like this is a plain vanilla split – no sales, no IRAs, nothing funky. If so, no income tax consequences.

Feel better?

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
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Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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