Taxes on money from divorce

[Cross Hair]

What is the name of your state (only U.S. law)? Ohio

Our divorce was final Feb. 2009. I had to buy out my ex's equity in our house and now she is crying about money because she claims she is being taxed on the payoff she received for the house and the 401K money I gave her.

I had warned her that withdrawing the 401K would result in taxes and a penalty so that is her own fault but I never thought about the house money being counted as income for her.

It really doesn't make much sense that she is being taxed on something that technically she already owned (her half of the house).

Is she right or is she getting bad advise?

Don

 

[mistoffolees]

What is the name of your state (only U.S. law)? Ohio

Our divorce was final Feb. 2009. I had to buy out my ex's equity in our house and now she is crying about money because she claims she is being taxed on the payoff she received for the house and the 401K money I gave her.

I had warned her that withdrawing the 401K would result in taxes and a penalty so that is her own fault but I never thought about the house money being counted as income for her.

It really doesn't make much sense that she is being taxed on something that technically she already owned (her half of the house).

Is she right or is she getting bad advise?

Don

How was the 401K transferred? It should have been transferred via QDRO, in which case it would have gone to her in a pre-tax account and taxes would clearly have been her responsibility if she withdrew the money (*). OTOH, if YOU signed to have the money taken out of the account, it would be your responsibility. So what (exactly) did the decree say about that money and provide the timeline on who did what and when.

The house isn't quite as simple as you state. When you sell a house, you owe capital gains on the increase in the value of the home. If you roll that into another house within some time period, you don't have to pay capital gains. Also, there's a floor on the capital gains before you have to start paying tax. So, if she didn't roll the money into another home and if the increase in value was greater than a certain amount ($250 K, I believe, but look it up), then it's possible that she would owe capital gains taxes. I'm not sure about that because I don't know if a cash distribution as part of a divorce counts as a sale from her perspective or not, but it's possible.

If the amount falls under the exemption amount, then it's probably just a matter of her not filling out the forms properly and showing that it's exempt from capital gains.

Money from the home would not be subject to income taxes, however.



(*) For other readers here, it is imperative to consider the tax consequences when trading off pre-tax and after-tax accounts. Ldij will tell you it doesn't matter - and that's true if you expect that your tax rate will be zero when you withdraw the money. If, OTOH, you live in the real world, tax rates are greater than zero, so pre-tax assets have a different value than after-tax assets and you have to consider this difference in setting up property divisions. Ideally, pre-tax assets and after-tax assets should be divided separately so the end result is correct with no need to guess on future tax rates.

 

[LdiJ]

What is the name of your state (only U.S. law)? Ohio

Our divorce was final Feb. 2009. I had to buy out my ex's equity in our house and now she is crying about money because she claims she is being taxed on the payoff she received for the house and the 401K money I gave her.

I had warned her that withdrawing the 401K would result in taxes and a penalty so that is her own fault but I never thought about the house money being counted as income for her.

It really doesn't make much sense that she is being taxed on something that technically she already owned (her half of the house).

Is she right or is she getting bad advise?

Don

As far as the house money is concerned, yes, she is getting very bad advice. In no way is that taxable income.

 

[LdiJ]

How was the 401K transferred? It should have been transferred via QDRO, in which case it would have gone to her in a pre-tax account and taxes would clearly have been her responsibility if she withdrew the money (*). OTOH, if YOU signed to have the money taken out of the account, it would be your responsibility. So what (exactly) did the decree say about that money and provide the timeline on who did what and when.

The house isn't quite as simple as you state. When you sell a house, you owe capital gains on the increase in the value of the home. If you roll that into another house within some time period, you don't have to pay capital gains. Also, there's a floor on the capital gains before you have to start paying tax. So, if she didn't roll the money into another home and if the increase in value was greater than a certain amount ($250 K, I believe, but look it up), then it's possible that she would owe capital gains taxes. I'm not sure about that because I don't know if a cash distribution as part of a divorce counts as a sale from her perspective or not, but it's possible.

If the amount falls under the exemption amount, then it's probably just a matter of her not filling out the forms properly and showing that it's exempt from capital gains.

Money from the home would not be subject to income taxes, however.



(*) For other readers here, it is imperative to consider the tax consequences when trading off pre-tax and after-tax accounts. Ldij will tell you it doesn't matter - and that's true if you expect that your tax rate will be zero when you withdraw the money. If, OTOH, you live in the real world, tax rates are greater than zero, so pre-tax assets have a different value than after-tax assets and you have to consider this difference in setting up property divisions. Ideally, pre-tax assets and after-tax assets should be divided separately so the end result is correct with no need to guess on future tax rates.

The bolded is incorrect.

For about the last 15 years, the rule is as follows:

Each person has a 250k capital gains exclusion on the sale of a primary residence. (must have been your primary residence two of the last five years).

You may not sell a primary residence (and take the exclusion) more often than every two years, UNLESS you qualify for an exception. Divorce is an exception.

There are no longer any rollover provisions.

A cash distribution from a spouse (rather than the actual sale of a home) does not count as a sale and therefore would have no tax consequences at all.

 

[Cross Hair]

Her money from the house was less than 250K, so IMO evan if it was considered a "sale" she should be exempt from taxes. That is exactly what I had told her pre-divorce but now she claims the person doing her taxes is telling her she has to pay taxes on that because it is "income".

As for the 401K money, the transfer was done with a QDRO, it is spelled out in our divorce decree. I asked her if she withdrew the money and she never answered, my guess is she did. I had warned her of the taxes and penalty if she did.

Thanks for the help.

 

[LdiJ]

Her money from the house was less than 250K, so IMO evan if it was considered a "sale" she should be exempt from taxes. That is exactly what I had told her pre-divorce but now she claims the person doing her taxes is telling her she has to pay taxes on that because it is "income".

As for the 401K money, the transfer was done with a QDRO, it is spelled out in our divorce decree. I asked her if she withdrew the money and she never answered, my guess is she did. I had warned her of the taxes and penalty if she did.

Thanks for the help.

Then the person doing her taxes is an idiot. Because you gave her her share of the equity, she doesn't even have to report the money (and then exclude it) on her tax return.

However, if she withdrew the 401k money, rather than rolling it into another retirement account, then yes, she absolutely has to pay taxes on that.

She needs to find a new tax professional.

 

[mistoffolees]

Her money from the house was less than 250K, so IMO evan if it was considered a "sale" she should be exempt from taxes. That is exactly what I had told her pre-divorce but now she claims the person doing her taxes is telling her she has to pay taxes on that because it is "income".

As for the 401K money, the transfer was done with a QDRO, it is spelled out in our divorce decree. I asked her if she withdrew the money and she never answered, my guess is she did. I had warned her of the taxes and penalty if she did.

Thanks for the help.

Then ignore all her whining. Or, you could simply send her a copy of the IRS rules on the subject (do a google search).

If she tries to sue you, you shouldn't have any problem winning (and possiby even getting the court to order her to pay your legal expenses).

 

[LdiJ]

Then ignore all her whining. Or, you could simply send her a copy of the IRS rules on the subject (do a google search).

If she tries to sue you, you shouldn't have any problem winning (and possiby even getting the court to order her to pay your legal expenses).

Where did he indicate that she intended to sue him?

Not all divorced people hate each other. Some actually maintain a friendly relationship. It sounded to me like he was simply trying to help her.

My ex still comes to me for tax and financial advice, 19 years after the fact, LOL.

 

[mistoffolees]

Where did he indicate that she intended to sue him?

Not all divorced people hate each other. Some actually maintain a friendly relationship. It sounded to me like he was simply trying to help her.

My ex still comes to me for tax and financial advice, 19 years after the fact, LOL.

"now she is crying about money because she claims she is being taxed on the payoff she received for the house and the 401K money I gave her."

Sounds like she's making enough of an issue that he's concerned.

"Let her sue" clearly doesn't mean that she is going to sue or that he should encourage her to. It means that he has nothing to worry about and if she wants to sue, there's nothing he can do to stop it, but he'll win in the end.

 

[Cross Hair]

No, she isn't threatening to sue or go to court for more money. What started this is she wants to take the kids on vacation this summer (I have full custody) and asked me to pay for their plane tickets and give them spending money. She skated out of the marriage with over 220K in cash and assets so I told her to use her own money if she wants to take them on vacation. That's when the crying started about how "broke" she and how she has a "huge" tax bill because of the house money and the 401K money. Just for the record she moved out of our house and in with her boyfriend so it's not like she bought a new house or car.

Anyway, this is a legal advice forum and not a post marriage help forum so I'll leave it at that.

Thanks for the help,
Don

 

[mistoffolees]

As I said, just ignore her. You have no obligation to cover her tax mistakes. Nor do you have an obligation to pay for her vacation. If she cashed out a 401K when she didn't absolutely need the money, then she deserves the tax hit.