Are cash settlements subject to tax?

In a divorce, it depends on how it is classified. If it is spousal support, it is taxable to the recipient and tax deductible by the spouse who pays it. If it is a property settlement, it is not taxable or deductible.

How do you know if your support which is taxable versus a property settlement that isn’t?

It is important for a divorcing couple to distinguish between payments that are for spousal support and those that are part of a property settlement.

This is critical, if for no other reason, than tax consequences. Spousal support is different from property distributions, which are usually without tax consequences to either spouse. Failure to properly distinguish spousal support can result in drastic consequences to the spouse paying support.

When it comes to property division, the terms and conditions of an agreement are negotiated as to who gets what. If one of the parties gets remarried, the property division is unaffected.

Support on the other hand, is often modifiable, based on changing circumstances in the future, such as changes in employment or retirement. In addition, if the recipient gets remarried the spousal support is terminated.

Spousal support continues during the lives of the spouses; property settlements are inheritable and can be enforced by the decedent’s estate.

According to IRS Publication 504, most of the rules will likely be unchanged from year to year. However, they could and if they do, it is important to speak to an experienced attorney for the help you need.

Contact the Family Law offices of Holstrom, Block & Parke if you have questions about how divorce might affect your holdings and financial status. We can help guide you through these trying decisions. We are located in Riverside and Orange Counties for your convenience.