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Old 09-02-2013, 09:32 PM
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Who pays tax on divorce ordered ESOP disbursement?

My husband is finalizing our divorce with the courts on Wednesday. He is asking for a court order that would allow him to withdraw funds from his ESOP in order to settle asset division in the divorce. The court order states that the check from the ESOP will be sent to me.

My question is who will have to pay taxes on and report the money? Him or me?

We have been physically separated for all of 2013, so I know that I can file taxes as single "head of household" and I know that I will receive a generous tax refund because I qualify for the earned income credit, child credit, etc. so I don't want to jeopardize losing that refund because of this ESOP disbursement.

Please help.



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Old 09-03-2013, 03:38 AM
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Originally Posted by kfrey76 View Post

My question is who will have to pay taxes on and report the money? Him or me?

.
So, yur question is:when you receive a percentage of your psouse’s ESOP account in your divorce settlement, then how much should be held back for taxes and how is it declared? I assume that the paying spouse's company did not hold out any taxes or fees on the disbursement.As long as the distribution is made via a check from an ESOP retirement plan then it would all be subject to income taxes for 2013. You should receive a 1099-R next January, 2014, as long as the distribution is made in accordance with a QDRO, Qualified Domestic Relations Orders, then the 10% penalty will not apply. Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are from a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees). An ESOP is a type of tax-qualified Defined Contribution retirement plan, Please contact the IRS for more info in detail.



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Old 09-03-2013, 10:10 AM
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Originally Posted by Wnhough View Post
So, yur question is:when you receive a percentage of your psouse’s ESOP account in your divorce settlement, then how much should be held back for taxes and how is it declared? I assume that the paying spouse's company did not hold out any taxes or fees on the disbursement.As long as the distribution is made via a check from an ESOP retirement plan then it would all be subject to income taxes for 2013. You should receive a 1099-R next January, 2014, as long as the distribution is made in accordance with a QDRO, Qualified Domestic Relations Orders, then the 10% penalty will not apply.
Thank you for your response. You got close to answering my question. I am not concerned with how much should be held back for taxes or how much tax will have to be paid. However, your response brings up another question. Can someone get a disbursement from their ESOP for any reason? I ask this because you said that the QDRA would allow the money to be dispersed without penalty. So, if he can get to the money without having the QDRA, than this would be a non-issue.

My real concern is that this disbursement will change my eligibility for the earned income credit when I file my taxes next year because it will increase the amount of income that I report on my return.

Thanks!



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Old 09-03-2013, 03:49 PM
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Originally Posted by kfrey76 View Post
#1: Can someone get a disbursement from their ESOP for any reason? I ask this because you said that the QDRA would allow the money to be dispersed without penalty. So, if he can get to the money without having the QDRA, than this would be a non-issue.

#2;My real concern is that this disbursement will change my eligibility for the earned income credit when I file my taxes next year because it will increase the amount of income that I report on my return.

Thanks!
#1;What I said was : “as long as the distribution is made in accordance with a QDRO, Qualified Domestic Relations Orders, then the 10% penalty will not apply”; I didin’t say:” QDRO would allow someone get a disbursement from their ESOP for any reason”.” A QDRO is a domestic relations order that creates or recognizes the existence of an alternate payee's right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements.”

#2;As said, as long as the distribution is made via a check from an ESOP retirement plan then it would all be subject to income taxes for 2013(and it also increases your AGI/TI/Tax liability). HOWEVER, the tax does not apply to distribution as long as the distribution is from a qualified retirement plan (other than an IRA) after the year you reached age 59.5.So I guess you need to find a local family law attorney who understands ERISA. Generally speaking you can receive cash from an ESOP , but there can be major tax implications. I would encourge you to contact local counsel immediately. A divorce settlement can be structured to minimize tax implications but more importantly, it should be structured so that you are treated fairly



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Old 09-03-2013, 03:58 PM
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Thank you SO much! You answered my questions.



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Old 08-25-2015, 07:00 AM
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Divorce creates lots of disturbance in life. So instead of going for divorce we have to think twice and try to solve the problem by general discussion only. We have to take help from some divorce lawyer they guide us in a proper way. I took help divorce lawyer from leemeierlaw.com firm. He guide me properly in each and every step.



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Old 08-26-2015, 01:20 PM
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My question is who will have to pay taxes on and report the money? Him or me? =========>> A divorce settlement can be structured to minimize tax implications but more importantly, so, it should be structured so that you are treated fairly. If the distribution was made via a check from an ESOP retirement plan then it would all be subject to income taxes for 2015. you should receive a 1099-R in January 2016. it would be reported as ordinary income on line 16a and 16b of Form 1040. The amount of income taxes would depend on the amount of the distribution, the amount of your other income, filing status and deductions. If the distribution was made in accordance with a qualified domestic relations order then the 10% penalty will not apply.so, in general, you can cash the ESOP whenever you want, but there can be major tax implications.i guess you need some professional help by contacting local counsel, a tax attorney.


We have been physically separated for all of 2013, so I know that I can file taxes as single "head of household" and I know that I will receive a generous tax refund because I qualify for the earned income credit, child credit, etc. ==>> I guess so;you no longer files as MFJ or MFS. You may be able to file as head of household if you are unmarried or “considered unmarried” on the last day of the year; Your spouse did not live in your home during the last 6 months of the tax year;a qualifying person lived with you in the home for more than half the year .However, if the “qualifying person” is your dependent parent, he or she does not have to live with you.


so I don't want to jeopardize losing that refund because of this ESOP disbursement.====>>As mentioned above.



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