When a marriage ends, financial questions often come to the forefront. One of the most common is whether your divorce settlement will create tax liabilities. Because Arizona is a community property state, dividing assets can be complicated, and knowing the tax treatment of each part of your settlement is important for protecting your financial future.
At Cohen Family Law, we help Arizona clients through divorce and related tax concerns. Our team understands how IRS rules affect property division, support payments, and retirement accounts. We will guide you through the process so you feel informed and supported as you make decisions about your next chapter.
Do I Have to Report Divorce Settlement Money to the IRS?
Not all parts of a divorce settlement are treated the same for tax purposes. Generally, the IRS does not view the division of marital property as a taxable event if the transfer is connected to the divorce. But depending on the type of settlement you receive, there may be tax reporting obligations later. For example:
- Property transfers between spouses as part of the divorce are typically not taxable if they occur within a year of the divorce or within six years if specifically required by the divorce agreement.
- Spousal maintenance (alimony) payments in divorces finalized after 2018 are not deductible for the paying spouse or taxable to the recipient under federal law.
- Child support is not considered taxable income for the receiving parent and is not deductible for the paying parent.
Understanding how each piece of your settlement is categorized will determine whether you must report it to the IRS.
Dividing Marital Property and Taxes in Arizona
Arizona’s community property system means that assets acquired during marriage generally belong equally to both spouses. When property is divided:
- Transfers made as part of the divorce are not taxed immediately.
- Once you own the asset, however, you are responsible for future taxes on the income it generates, such as rental payments from a property you receive.
- If you later sell the asset, capital gains taxes may apply.
This makes it important to think not only about what property you receive but also about the long-term tax implications.
How Are Retirement Accounts Treated?
Retirement accounts are often one of the most valuable assets divided in a divorce. With the right approach, the transfer can be tax-free:
- A Qualified Domestic Relations Order (QDRO) allows funds from a retirement plan like a 401(k) to be transferred without triggering taxes if rolled into another qualified account.
- IRAs can be divided under the divorce decree, with transfers treated as non-taxable if properly executed.
If funds are cashed out instead of rolled over, the receiving spouse may face income taxes and possible penalties. We help our clients structure these transfers carefully to avoid unexpected tax bills.
What About Lump-Sum Divorce Payments?
Lump-sum settlements can raise different tax questions. For instance:
- If a lump-sum payment is simply the transfer of marital property, it is usually not taxable at the time of transfer.
- If the payment is structured as support, the same rules as ongoing spousal maintenance apply—meaning it is not deductible or taxable under current federal law.
Because details matter, it’s important to review how any lump-sum payment is characterized in your divorce agreement.
Businesses and Other Complex Assets
When a business is part of the marital estate, division can be challenging. Sometimes one spouse keeps the business while the other receives an offset in the form of property or cash. While the transfer itself may not be taxed immediately, future income from the business or assets received in exchange will be taxable to the recipient.
Why Work With Cohen Family Law?
Divorce settlements affect both your immediate finances and your long-term stability. At Cohen Family Law, we take the time to explain the tax treatment of each part of your settlement and work with you to protect your property rights. We combine practical guidance with strong advocacy, whether in negotiations or in court.
If you are concerned about the tax consequences of your divorce settlement, we are ready to help. Contact Cohen Family Law today to schedule a consultation and get clarity on your financial future.
Common Questions About Divorce Settlements and Taxes
Are divorce settlements taxable in Arizona?
Generally, dividing marital property in an Arizona divorce is not a taxable event. But future income from transferred assets is taxable.
Do I pay taxes on spousal maintenance in 2025?
If your divorce was finalized after 2018, alimony payments are not deductible for the payer and not taxable for the recipient.
Is child support taxable income?
No. Child support is not considered income for tax purposes, and it cannot be deducted by the paying parent.
