I recently answered a question on a legal bulletin board, and I thought the topic was relevant for our broader practice audience.

I recevied 444,000 as a divorce settlement; I am liable for the taxes on this amount?

Short answer: probably.

More complex answer: Did you already have this money in your accounts? If so, then probably not. Dividing money already accounted for on previous tax year filings is not taxable again. However, withdrawing money from pensions, or drawing a gross “alimony” settlement at once…yes. So, as always, it depends. Alimony payment may be deducted from the payor (the one who pays), and is taxable to the payee (the one who receives).

Your divorce settlement or order should always include language that states:

“Any and all taxes related to the payment of any sum under this agreement is the responsibility of the party receiving such funds and will be fully deductible by the payor to the maximum extent permitted by law.”

In fact, this statement doesn’t cover any new ground. However, it ensures that you don’t mistakenly miss something that will end up causing litigation later (i.e. someone thought that the cash-out of the IRA would be taxable to the payor, not to the individual receiving the money…etc.).

If ye olde taxes are due, to minimize impact (ouch), you need to speak to a tax advisor — either a CPA or a lawyer. Now, your divorce attorney ought to have spoken with you about this before taking a lump sum settlement. So, check with him or her, first. However, anytime you have a potential taxable event of $50,000 or more, you need to be very careful. Such large, one time actions, tend to draw the attention of the automated checking systems at the IRS. $444K? Almost surely would.

If you need help reviewing a divorce decree or settlement agreement, contact us! You need to have those documents professionally reviewed, and a strategy developed to address that type of potential income.

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