Tax Aspects of Divorce: From Alimony to Property Settlements

Property settlements are a major component of a divorce settlement. Although the transfer itself isn't taxed, there are tax consequences that should be considered. Appreciated property and stock transfers are usually divided based on fair market value; however, the cost basis of the items transferred can generate substantially different tax payments for the taxpayer and spouse. Eligibility requirements for the IRC Section 121 gain exclusions must be considered when a personal residence is sold or transferred incident to divorce. And a qualified domestic relations order may be needed to defer taxes on retirement plan transfers.

The Tax Act of 2017 significantly altered the tax consequences of divorce. Beginning with 2019 divorce agreements, alimony is no longer deductible by the payor or taxed to the recipient. However, older agreements can be modified to incorporate changes made by the Act. The suspension of the dependency deduction somewhat negated the need for certain provisions in a separation agreement. Beginning in 2026, however, the dependency deduction returns, making this again a relative tax choice for divorcing parents. Tax advisers working with married clients need to know the tax consequences of decisions made during a divorce.

Listen as our panel of individual income tax experts reviews the particulars of tax planning relative to divorce, focusing on tax-saving steps for divorcing clients.