Do Gift Taxes Apply When Dividing Property During Divorce?

 Posted on June 18, 2021 in Taxation Law

Divorcing couples often need to address complex financial issues, especially if they will be dividing multiple types of property, assets, and debts. In addition to determining how they can divide all of their marital property fairly and equitably, couples will also need to understand how the decisions they make will affect their tax obligations. When addressing issues related to divorce and taxes, including gift taxes, it is important to work with an attorney who understands how tax laws apply to property settlements.

Divorce Settlements and Non-Taxable Gifts

When a person makes a gift of money or property to someone else, gift taxes may apply, and a gift tax return may need to be filed. However, in most cases, transfers of property between spouses either before or after their divorce are exempt from gift taxes. Typically, these transfers will be considered non-taxable gifts if they fall into one of the following categories:

• Property transfers that are ordered in a divorce decree, including property settlements made before completing a divorce that were incorporated into a divorce decree.
• Property transfers made through a written agreement between the parties, including transfers meant to provide financial support for the couple’s children. These types of transfers must take place within 1 year before or 2 years after the date the agreement was executed.
• Property transfers made to settle marital support rights, such as a monetary lump sum paid in return for a waiver of the obligation to provide spousal support. Gift taxes will not apply to these transfers so long as the amount of money or property transferred is not larger than the value of the spousal support rights.
• Property transfers made before the finalization of a divorce that qualify for the marital deduction. This deduction allows spouses to transfer property to each other without being subject to gift taxes. However, this deduction does not apply to certain types of transfers, including transfers of some types of interests in trusts, as well as transfers to a spouse who is not a U.S. citizen.
• Property transfers that qualify for the annual gift tax exclusion. As of 2021, a person may exclude gifts to another person totaling up to $15,000 each year. For property transfers to a non-U.S. citizen spouse, the annual exclusion is $157,000.
• Property transfers involving direct payments for medical care or tuition made on behalf of a person’s former spouse.

Contact Our San Jose Tax Law Attorney for Gift Taxes and Divorce

Even though most divorce cases will not involve gift taxes, spouses will want to be sure to understand how the decisions they make about property division will affect their tax obligations. At John D. Teter Law Offices, we can review a proposed divorce settlement and identify any tax issues that may affect you, and we will advise you on the best ways to avoid paying unnecessary taxes or address outstanding tax debts. For legal help with divorce-related tax issues, contact our San Jose, CA tax lawyer at 408-866-1810.

Sources:

https://www.irs.gov/pub/irs-pdf/p504.pdf