Taxes are an often-overlooked factor when dividing retirement benefits in divorce—but they can have a major impact on the outcome.

One key issue arises when payments are made directly by the employee spouse instead of through the retirement plan. In these situations, tax rules can become complicated.

Historically, the IRS has applied the “assignment of income” doctrine. This means that if the employee spouse earns income and then pays a portion to the former spouse, the income may still be taxed to the employee—not the recipient.

This can create unexpected tax burdens if not properly addressed.

What About Court-Ordered Payments?

Even when payments are ordered by the court, tax treatment does not automatically shift. The structure of the division—particularly whether a QDRO is used—can affect who is responsible for taxes.

When payments are made directly from the retirement plan to the nonemployee spouse under a proper order, the tax burden is typically shifted to the recipient. This is often the preferred approach.

Gillmore Election Tax Issues

Tax complications can also arise with Gillmore elections. If the employee spouse continues working and pays the nonemployee spouse out of pocket, those payments may still be treated as taxable income to the employee.

Court rulings have reinforced this principle, making it important to carefully structure any arrangement involving early payments.

Why Tax Planning Matters

Failing to consider taxes can result in:

• Unexpected liabilities
• Reduced net value of assets
• Disputes after the divorce is finalized

Proper planning ensures that both parties understand the true value of what they are receiving.

Why You Should Speak With a Family Law Attorney
Pension division is not just a legal issue—it is a financial one. A family law attorney can coordinate with tax professionals to structure your settlement in a way that minimizes risk and protects your financial interests.