Tax Consequences of a Phoenix, Arizona Divorce

If you are considering divorce, you are probably wondering whether your divorce settlement is taxable. Given that Arizona is a community property state and there are numerous types of assets that will be divided, it takes an adept divorce attorney to help you consider and plan for the potential tax consequences. 

At Cohen Family Law, we regularly guide clients throughout the divorce process. We have in-depth knowledge of the applicable Internal Revenue Service (IRS) rules and will work strategically to protect your interests and your assets. 

Once you become our client, we will help you reach an agreement about the division of property as part of your comprehensive divorce settlement. We are not only highly skilled negotiators but also trial-ready lawyers fully prepared to litigate to achieve the best possible outcome. 

Trust our legal team to help you mitigate the tax consequences of your divorce settlement. When you come to our Phoenix office, you will find a supportive environment in which you can make informed decisions about your future. Contact us today to set up an appointment. 

The Tax Consequences of Dividing Marital Property in an Arizona Divorce

Arizona is a community property state, which means that property acquired by a couple during a marriage is considered to be the community property of both spouses, regardless of how the property is titled. Although the marital property is intended to be divided evenly, an equal split is often impractical. So the courts determine the value of the community property as a whole and divide the net worth so that each party retains ownership of 50 percent of the communal assets.

Because divorce involves a significant amount of asset transfers, there are significant tax ramifications that must be planned for and considered. 

Tax on Distributed Property in an Arizona Divorce

The divorce judgment will distribute all of your marital property and indicate how the items are divided. Depending on the circumstances, items that were jointly owned during the marriage may be transferred to one spouse’s name. Other assets that were held in one spouse’s name are considered marital property. If the court distributes any of those assets to the other spouse, they will also need to be transferred to that spouse’s name. 

Under IRS rules, such transfers do not trigger a taxable loss or gain as long as the transfer occurs:

  1. Within one year of the dissolution of the marriage, or 
  2. Not more than 6 years after the termination of the marriage if it is pursuant to a divorce or separation agreement. 

Transfers that occur outside of these timelines are considered a taxable event by the IRS.

Tax on Support Payments in a Divorce

Under current federal tax law, spousal support payments are not tax-deductible to the paying spouse or taxable for the receiving spouse. In short, spousal support is paid with after-tax dollars, making it more expensive to pay, which can become a factor in negotiating a divorce settlement. 

In addition, child support payments are not tax-deductible for the paying spouse or taxable income for the recipient spouse

Taxation of Income

Once property is distributed, the spouse who becomes the owner will be responsible for taxes on any income the property produces (e,g, rental income from a commercial building with leases).

Retirement Assets

Retirement benefits are considered marital property and are subject to division in a divorce. The two most common types of retirement plans, (e.g. 401(k), IRA, Roth IRA), are “defined contribution plans” and defined benefit plans, or an employer-sponsored plan such as a pension. When retirement assets are divided, they are not generally taxable to the payee as long as the funds are rolled into a qualifying investment account. 

Businesses

A closely-held business launched after marriage is also considered community property that is subject to division in an Arizona divorce. Because a business may not survive after a property division, the non-owning spouse may be awarded other assets, such as a larger share of the family home or a cash payout, which could result in tax consequences for the recipient spouse. 

Lump-sum Payments 

Lump-sum payments made in a divorce are typically taxable. If the spouses agree to a lump-sum payment to arrive at a fair distribution of their community property, the receiving spouse will be responsible for paying taxes on that payment. 

Why Choose Cohen Family Law?

Because divorce can have a significant impact on your finances, it is crucial to protect your assets. When you become our client, we will take the time to understand your circumstances, work to protect your property rights, and plan and prepare for the potential tax consequences. 

Our experienced divorce attorneys will help you navigate this difficult transition and stand by you every step of the way. Above all, we will offer you compassionate, efficient representation and dependable service and make sure your interests are protected.

Contact Our Experienced Arizona Divorce Attorneys Today

If you have concerns about the tax consequences of divorce, turn to Cohen Family Law. We have a well-earned reputation as dedicated advocates who provide our clients with informed representation when they need it most. Contact our office today for a consultation.