couple discussing divorce settlement and taxes with an enrolled agent

Tax Planning

In a property settlement, the tax basis must be considered when dividing the assets. A spouse who receives a low basis asset should negotiate the appropriate offset factor to the asset's fair market value.

Example: One spouse receives 100 shares in a publicly traded corporation worth $100,000 with zero basis. The other spouse receives their $100,000 savings account. FMV of each asset is equal. However, if the 100 shares are liquidated, the after-tax value is $80,000 after deducting 20% ($20,000) for federal tax. In this case, the offset factor would be the $20,000 tax. The spouse with the shares should get an additional $10,000 from the savings account in order that each spouse receives an equal share of $90,000.

Savings Bonds - If U.S. Savings Bonds are transferred incident to a divorce, the spouse transferring the bonds must include in income all interest earned on the bonds up to the date of transfer, but not previously reported. Interest earned after the date of the transfer is included in the income of the recipient. Basis of bonds received is increased by interest included in transferor's income.

The negotiation of divorce and property settlements can significantly affect taxes.

family in front of home holding thumbs up

Legal fees and court costs of getting a divorce are not deductible. Nondeductible costs include expenses paid in arranging child custody and support. Expenses paid in arriving at a financial settlement and retaining income-producing property are also considered nondeductible.

Legal fees paid specifically for property settlement may be added to the property's basis. Deductible (legal or accounting) costs: Fees paid for tax advice relating to a divorce.

tax calculator

If a couple divorces after making joint estimated tax payments and later files separate returns, estimated tax payments may be allocated based on each spouse's share of the current year's tax liability; or claimed in full by one spouse; or claimed in part by each spouse.

Whatever your marital status was on December 31st of the tax year in question, the IRS considers your status to have been that for the entire tax year, i.e., your divorce is recorded at the courthouse in January 2015, for 2014 you are considered married.

There is a special tax rule known as the "abandoned spouse rule", whereby a separated parent with a child or children, can use the Head of Household filing status rather than the Married Filing Separate status. This option is available only if the parties did not cohabitate any part of the last six months of the tax year.

The separated parent that does not have possession or custody of the child or children must file Married Filing Separate.

Joint Liability

Couples who file jointly are each individually and jointly responsible for any tax, interest, or penalty applicable to the return. This is true even if the divorce decree states that one spouse is responsible for previously filed joint returns. Back taxes owed due to an audit are the responsibility of each spouse.

Have a question about how taxes may affect your divorce settlement? Ask the experts.
Buddy Fricke, EA

Buddy Fricke, EA

Accredited Tax Advisor

Buddy Fricke, EA

Accredited Tax Advisor
Buddy Fricke, EA

Buddy is a graduate of Auburn University. He holds a Bachelors of Science degree in Mathematics.

Direct Phone: (256) 586-4141
Mary L. Penton, EA

Mary L. Penton, EA

Tax Department

Mary L. Penton, EA

Tax Department
Mary L. Penton, EA

Mary is a graduate of the University of Alabama Huntsville. She holds a Bachelors of Science in Accounting.

Direct Phone: (256) 586-4135
Anthony Nash, CPA

Anthony Nash, CPA

Chartered Global Management Accountant

Anthony Nash, CPA

Chartered Global Management Accountant
Anthony Nash, CPA

Anthony is a graduate of the University of Alabama in Tuscaloosa. He holds a Bachelors of Science in Accounting.

Direct Phone: (256) 586-4153
Jonathan R. Neighbors, EA

Jonathan R. Neighbors, EA

Tax Department

Jonathan R. Neighbors, EA

Tax Department
Jonathan R. Neighbors, EA

Jonathan is a 2005 graduate of the University in Tuscaloosa. He received a Bachelor of Science degree in Accounting.

Direct Phone: (256) 586-4157