Two spouses can split their assets evenly on paper and still end up with very different amounts. Recognizing how taxes follow certain property after the marriage ends helps you judge whether a proposed settlement is as fair as it appears.
Your tax basis after a transfer
When you receive an asset from your spouse or former spouse in a divorce, you generally owe no federal income tax on the transfer. You also take over the prior owner’s adjusted basis, which usually starts with the purchase price and later helps determine your gain.
Suppose the settlement gives you a $400,000 stock portfolio with a $100,000 basis. Selling the shares at their current value could produce a $300,000 gain and leave you with less after taxes than an equal cash award.
Taxes on retirement accounts, business shares and rentals
The federal tax you owe depends on the type of asset you receive and on how you draw money from it. Several common situations show how that works:
- Withdrawals of pretax funds from a traditional retirement account count as ordinary income
- A company’s buyback of one spouse’s shares can leave either of you owing tax on a gain or a dividend
- A rental property can produce a gain even at its original purchase price
When a fair division requires a sale, an Ohio court must consider costs such as broker commissions. Those expenses reduce the proceeds available to split.
Tax decisions before you sign
An after-tax estimate shows what you would keep under each proposal. Your settlement can say who pays any later bill on a past joint return, though the IRS can still collect from either of you.
Dividing most employer retirement plans requires a court order the plan administrator approves as a qualified domestic relations order. Other transfers between former spouses keep that tax-free treatment within one year after the marriage ends.