Christopher S. Mulvaney,

Attorney and Counselor-at-Law

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THIS WEBSITE INCLUDES GENERAL INFORMATION & THE OPINIONS OF CHRISTOPHER S. MULVANEY. IT IS INTENDED TO STIMULATE A BASIS FOR QUESTIONS RELATED TO YOUR PARTICULAR FACTUAL CIRCUMSTANCES — BEFORE YOU ACT.  THIS WEBSITE DOES NOT CONSTITUTE LEGAL ADVICE. IF YOU WANT LEGAL ADVICE, PLEASE MAKE A ZOOM APPOINTMENT TO SPEAK WITH ME.

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Gonzaga University School of Law – Spokane, Washington – Class of 2002 – Cum Laude The Latin phrase “Deo patriae, scientiis, artibus” translates to “For God and country through sciences and arts”.  The initials A.M.D.G. on the seal of Gonzaga Law School stand for Ad Majorem Dei Gloriam, which is Latin for “For the Greater Glory of God” the Motto of the Society of Jesus (Jesuits): a Catholic religious order founded by St. Ignatius of Loyola.

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For lawyers advising divorcing clients, the most important tax issues to explain include property division and asset basis, the non-deductibility and non-taxability of alimony under current law, tax filing status changes, and rules regarding child-related tax benefits. 

Asset division and cost basis

• Property transfers are generally tax-free at transfer: Under IRC §1041, transferring assets between spouses (or former spouses incident to a divorce) does not trigger capital gains tax at the time of transfer.
• Cost basis carries over: The receiving spouse inherits the original cost basis of the asset. This means they assume the potential tax liability if and when they later sell the asset.
• Unequal after-tax value: Lawyers should caution clients that two assets with the same current market value may have vastly different after-tax values. An asset with a low cost basis will result in a larger capital gains tax when sold, making it less valuable than an asset with a higher basis.
• Home sale capital gains exclusion: Advise clients that if the marital home is sold before the divorce is finalized, they may qualify for a $500,000 capital gains exclusion if filing jointly. After the divorce, each spouse can typically only exclude $250,000 on their individual tax return.
  • Planning tip: Selling the home in a tax year before the divorce is finalized allows for the full $500,000 exclusion.
  • Buyouts are not taxable events: If one spouse buys out the other’s share of the home, the selling spouse does not owe capital gains tax on the buyout money because it is treated as a property transfer, not a sale to a third party.
• Retirement accounts: The division of 401(k)s and pensions requires a Qualified Domestic Relations Order (QDRO) to ensure a tax-free transfer. IRA assets can be transferred tax-free through a trustee-to-trustee transfer, as long as it is specified in the divorce decree.
  • Early withdrawal penalties: Taking a cash distribution from a retirement account as part of a settlement can trigger income tax and a 10% early withdrawal penalty for the recipient, except for certain QDRO-related distributions before age 59½. 

Alimony vs. child support (post-2018 Tax Cuts and Jobs Act (TCJA) rules)

• Alimony (post-2018): For divorce or separation agreements executed after December 31, 2018, alimony is no longer tax-deductible for the payer nor is it considered taxable income for the recipient.
  • This is a significant change that can affect a client’s cash flow and should be a central part of settlement negotiations.
• Child support: Child support payments have never been tax-deductible for the payer and are not considered taxable income for the recipient. 

Filing status and dependency exemptions

• Filing status depends on year-end marital status: A taxpayer’s marital status on December 31 of a given year determines their filing status for the entire year.
  • If divorced by year-end, clients must file as Single or Head of Household (if they qualify).
  • If not yet divorced, they can choose to file Married Filing Jointly (which may offer tax benefits but creates joint liability for any errors) or Married Filing Separately.
• Head of household: Explain that filing as Head of Household offers a higher standard deduction than filing as Single and is available to separated individuals who pay for more than half the household costs and have a qualifying dependent child.
• Child tax credits: The custodial parent is typically entitled to claim the child-related tax benefits. However, parents can agree for the non-custodial parent to claim the child, but the custodial parent must provide the non-custodial parent with a signed IRS Form 8332 every year. 

Other key considerations

The value of professional advice: Stress the importance of consulting a tax professional to review any settlement agreement to prevent unforeseen tax liabilities and to ensure an equitable, after-tax division of assets.

Tax debt and innocent spouse relief: Remind clients that a divorce decree dividing tax debt does not bind the IRS. If a former spouse fails to pay their share of a joint tax debt, the IRS can still seek payment from the other party. Explain the option of seeking Innocent Spouse Relief if applicable.

Legal fees are generally non-deductible: Inform clients that the Tax Cuts and Jobs Act (TCJA) suspended the ability to deduct legal fees related to tax advice or alimony for tax years 2018–2025. Nearly all divorce legal fees are now considered non-deductible personal expenses.

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Washington State residents can meet with me in Zoom/DocuSign from anywhere in the world, and I can notarize their electronic signatures because I am a remote online notary.  Just email me an image of your photo ID.