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BE CAREFUL WHAT FUNDS ARE USED IN DIVORCE SETTLEMENTS

Payments to a spouse as a part of property settlement in divorce are generally considered non-taxable events.This rule does not apply, of course, to periodic alimony payments terminable on remarriage or death, which are considered income to the payee and a deduction to the payor.

Care must be taken even when payments to a spouse would normally be considered to be non taxable events. In Toombs v Commissioner (TC Summary Opinion 2013-51, June 25, 2013) the husband received $25,248 from his wife's retirement account, and upon receipt of those funds, paid $24,248 to the wife for her equity interest in the marital residence. The Tax Court ruled that since the husband received funds from the wife's retirement account and used those funds to pay his wife, the funds he received were taxable. The $1,000 difference ($25,248 - $24,248) in the transaction resulted in the husband owing $6,062 in Federal Income Taxes.

James A. Koerber, divorce tax and valuation expert from Hattiesburg, Mississippi, has written about the opinion and has stated that a better arrangement might have been for the ex-wife to simply keep the retirement funds since it was a such a small difference between the two amounts. Of course, the wife would not have access to liquid funds under that arrangement.

Jim Koerber, can be reached at jkoerber@koerbercompany.com