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.
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.
Alimony & separate maintenance payments are not deductible by the payer and are not included in income by the recipient spouse for any divorce or separate maintenance instrument executed after December 31, 2018.
Qualified Domestic Relations Order (QDRO)
Distributions from qualified retirement plans and tax-sheltered annuities are taxable to the plan participant and subject to early withdrawal penalties unless made to an alternate payee under a QDRO. A QDRO is a judgement, decree or court order issued under a state's domestic relations law that must state the following provisions:
- Someone other than the plan participate has a right to receive benefits from a qualified retirement plan or tax-sheltered annuity,
- Payment of child support, alimony or marital property rights are to be paid to a spouse, former spouse, child or other dependent of the participant, and
- The actual amount or a part of the participant's benefits are to be paid to the participant's spouse, former spouse, child or other dependent.
Distributions under a QDRO are taxable to the recipient spouse, but are not subject to an early withdrawal penalty. The penalty exception for payments to an alternate payee under a QDRO does not apply to IRAs.