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eTax Alert: Tax Ramifications of Divorce August 10, 2017

Divorce settlement, so what’s the first thing we need to know? In a divorce, if the division of the marital assets is a non-taxable event, that’s what quotation 10-41 says. Now, the problem is when it says it’s a not-taxable event, it’s treated like a gift. Most certainly it isn’t a gift. They like each other and so when we’re talking about a divisional marital asset is treated like a gift that means that the basis goes with whoever gets the property. It’s not a sale. It’s a gift. Why could we have a problem with this? What happens if we have two assets?


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Vern Hoven:
 Now, let’s look at the tax ramifications of getting divorced and the tax ramification of the alimony payment that occurs in a divorce, couple different code sections here.

My problem with getting a divorce is the client will come in during tax season having got divorced in the previous year, talk to the divorce attorney, and nobody told me. I wasn’t involved in helping negotiate the financial disclosure, the financial requirement, and there are major tax issues when we have that in a divorce. Why did my client’s attorney not take into account tax ramifications? Because there are divorce attorneys that don’t understand tax law, this tax tip is superb. Written in understandable language, third grade, fourth grade perfectly fit for an attorney. Did I apologize to the attorneys for that one?

Perfectly written in the fourth-grade language for the divorce attorneys and so that they can understand, here are the tax ramifications. What I would recommend you do as a preparer, grab the electronic version, you could just click on it, it will come up, put it on your own letter head, send it to every attorney in your area and then add a comment, these are the tax ramifications, please make sure any divorce you take a look at those. If you have any questions feel free to call me, we’ll give you an hour of free consultation, whatever you want. But it’s a great discussion in trying to get us involved during the divorce proceedings instead of the default position where we can’t fix it the following years. I like to this tax tip.

Divorce settlement, so what’s the first thing we need to know? In a divorce, if the division of the marital assets is a non-taxable event, that’s what quotation 10-41 says. Now, the problem is when it says it’s a not-taxable event, it’s treated like a gift. Most certainly it isn’t a gift. They like each other and so when we’re talking about a divisional marital asset is treated like a gift that means that the basis goes with whoever gets the property. It’s not a sale. It’s a gift. Why could we have a problem with this? What happens if we have two assets?

$500,000 retirement plan, $500,000 personal residence, which one do your client want? Retirement plan basis is zero, future income $500,000. Personal residence, if a person receiving the house for $500,000 gets married even basis zero, no taxable event. And what happens with divorce attorneys, they don’t do the divorce settlement under, on an after-tax basis and yet now we see that this tax payer who receives a retirement plan is going to have to pay tax.

It’s not going to be $500,000 after tax. This person does with a home after tax so make sure we take into account– I’m trying to get the attorneys to do this, it’s tough. Into an account under an after-tax basis, it’s amazing. The number of times I’ve talked to the divorce attorneys were not marking divorce settlement agreement with an after tax or before tax. Get out of here CPA. You cause us problems.

[00:04:36] [END OF AUDIO]

Vern Hoven, CPA, MT, is one of America’s premier tax presenters and speaks to over 100 groups a year on a variety of tax topics. He teaches at Western CPE Federal Tax Update seminars and conferences and produces self-study and webcasts courses as well. Vern consistently receives outstanding evaluations and has won numerous teaching awards, including the prestigious AICPA 2014 Sidney Kess Award for Excellence in Continuing Education.
Vern is the author of the best-selling Real Estate Investor’s Tax Guide and a favorite interviewee on radio, television, and in newspapers. His presentation skills have earned him the coveted Certified Speaking Professional (CSP) designation from the National Speakers Association, which has granted only 400 CSPs out of 3,600 NSA members as of 2006.
Vern practiced in the public, governmental, and corporate accounting fields before starting his own public accounting practice in 1973, a firm that grew to one of the largest in western Montana. In 1985, he started his present tax consulting practice. CPA Magazine recognized Vern as one of the top 50 IRS representation practitioners in 2008.

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