Unexpected Tax Consequences of a Divorce

A Judgment for Dissolution of Marriage usually signifies the end of litigation – the start of a new life. The parties start to plan around this agreement and hope to recoup some of the costs of litigation. Then, when tax season comes along, you get an unexpected tax bill from the IRS. Some of these consequences can easily be fixed, while others may require more litigation.

If you filed jointly with your spouse, a Judgment for Dissolution of Marriage should have language allocating any liability 50/50, even if the taxes are related to prior years. There are also tax consequences of executing quit claim deeds which may or may not be exempt from tax liability. It is always good practice to include language that covers tax liability on the execution of deeds to avoid any surprises.

Tax liability on the transfer of 401(k)’s and other retirement accounts are usually tax-free events if done pursuant to a Judgment for Dissolution of Marriage. However, if you wait too long to execute a the transfer of a pension or 401(k) you may have a hard time convincing the IRS that the incident is “related” to the original judgment.

Finally, if in doubt of whether there is tax liability on a certain event, that issue should be reserved. The reservation of tax liability can be such a contested issue that some courts have considered said reservations as the bifurcation of a judgment, and have even awarded contribution to attorneys fees as if the parties were still married. If your counsel has advised you to reserve certain tax issues, it is important to be clear as to what issues are being specifically reserved and provide a time-line for the adjudication of said issues. Once there is proof of some liability, the Judge will look to the four corners of your Judgment to see if he/she has the authority to address these issues.

Tax issues are not to be taken lightly as they can be very expensive. If the only issue left in your divorce is a dispute about a certain tax liability, talk to an experienced attorney who can assess whether the issue is big enough to take to trial or to reserve for future adjudication.

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