The way the IRS treats various parts of the financial arrangements that accompany a divorce can play a major role in structuring those arrangements. Payments that qualify as alimony are deductible by the ex-spouse who pays them and taxed as income to the one who receives the money. Child support, on the other hand, is neither deductible nor taxed.
Stocks or other property received as part of a divorce settlement retain the same basis they had when owned by your ex-spouse. If, for example, you receive in a divorce settlement $10,000 of stock for which your spouse paid $3,000 and you sell the stock for $12,000, your gain is $9,000. In other words, the paper gain or loss that built up while your spouse owned the property and any tax liability for it are transferred to the recipient.
Careful tax planning can produce a settlement with the most favorable tax consequences for both parties - leaving more for each of you by limiting the government's share. If your differences keep you from addressing the tax issues, the only winner on this front will be the IRS.
Return to Deductions
