Tax Effects of Property & Debt Division

Summary:  In a properly-done divorce, the biggest tax impact is the payment of maintenance (alimony). Otherwise, the only other effects should be the change in filing status and the sharing of dependent tax exemptions. The payment of child support is not a taxable event. A division of a retirement plan is not a taxable transfer if a QDRO is used.

A Colorado Divorce Should Generally Be Tax-Free

Except for the change in filing status to unmarried and the tax effects of the payment of maintenance (alimony), a properly-done divorce should be tax-free.

The primary tax effects of a divorce can include:

1. The change in the filing status from married to unmarried;

2. The exemption for dependent children can be taken by only one of you each year, generally it is alternated (must be current on child support to take your exemption);

3. The payment of maintenance is tax deductible to the payor and taxable income to the recipient; and

4. The sale of any investment property may be taxable income, generally capital gain (the same as if you sold it during the marriage).

The following events are not taxable transactions:

1. The payment or receipt of child support;

2.` The sale of a principal residence, as long as the gain is less than $500,000 for a married couple (some exceptions do apply);

3. The division of retirement assets with a QDRO as long as none are withdrawn;

4. The division of investment accounts where none is sold;

5. The payment of cash to the other spouse as part of the divorce settlement; and

6. The refinance of any real property, either your home or rental property.