Is a Divorce Settlement Taxable in Long Island, New York?

When your marriage ends, the financial fallout doesn’t stop at dividing property or setting up support payments. You also have to deal with the IRS—and that’s where things get complicated. Many people find themselves asking, “Is a divorce settlement taxable?” The way your divorce is structured—especially when it comes to child support, spousal support, or dividing property—can carry serious tax consequences if you’re not prepared.

In New York, even seemingly straightforward agreements can come with hidden costs if you don’t understand how they’re treated under federal and state law. Knowing how divorce settlements are taxed—and how certain terms can affect your future filings—can help you avoid surprises when it’s time to file your next return.

Federal and New York Tax Treatment of Divorce Settlements

A divorce settlement often includes dividing marital property, assigning child support, and sometimes awarding spousal support (commonly referred to as maintenance in New York). Each of these components carries specific tax treatment under both federal and New York law.

• Spousal Support: Under the Tax Cuts and Jobs Act (TCJA), spousal support payments from divorce agreements finalized on or after January 1, 2019, are not deductible for the paying spouse and not taxable income for the recipient. New York follows this federal treatment.
• Child Support: Child support is not taxable to the receiving parent and not deductible by the paying parent. These payments are intended solely for the benefit of the child.
• Marital Property Division: Transfers of marital property made as part of a divorce are not considered taxable events under federal law, and New York generally follows the same approach. However, the cost basis of the transferred assets typically remains the same, which can result in future tax consequences—particularly for appreciating assets like real estate, stocks, or business interests.

New York’s equitable distribution system doesn’t always mean a 50/50 split. The division is based on fairness and may involve real estate, investment accounts, retirement savings, and other high-value assets. If you sell these assets later, capital gains taxes may apply at both the federal and state levels.

Tax Traps in Common Divorce Agreement Terms

Even when an agreement seems straightforward, the way your divorce is structured can have long-term tax consequences. Here are some common areas where tax issues arise:

• Retirement Accounts: If you divide a 401(k) or pension, you’ll typically need a Qualified Domestic Relations Order (QDRO) to avoid early withdrawal penalties or tax consequences. The spouse who receives the funds will eventually owe taxes when they withdraw the money, depending on the account type and timing.
• Real Estate: If one spouse keeps the marital home and later sells it, capital gains tax may apply, especially if they exceed the federal exemption amount. You also inherit the original cost basis, which can impact the size of your taxable gain.
• Investment Portfolios and Business Interests: After the divorce, the spouse awarded these assets is responsible for paying taxes on any income, dividends, or gains they generate. Transferring stocks or ownership interests also carries cost basis implications that affect future tax liability.

These issues are especially important in high-asset divorces, where poor planning can lead to surprise tax bills down the line. Some of these consequences don’t show up right away—such as when selling real estate, cashing out retirement funds, or triggering capital gains years later. Structuring your marital settlement agreement carefully—with input from both a divorce lawyer and tax advisor—can help you avoid costly mistakes, both now and in the future.

What About Attorney’s Fees?

You cannot deduct attorney’s fees related to the divorce process itself. However, you may be able to deduct fees paid for:

• Tax advice connected to the divorce
• Legal fees related to getting alimony that is taxable (in older cases finalized before 2019)

Talk to your tax advisor about whether any portion of your legal bill qualifies.

Why the Structure of the Settlement Agreement Matters

How your marital settlement agreement or separation agreement is written can significantly affect your tax treatment. It may also influence:

• Who pays taxes on investment income
• Who can claim deductions for children
• Whether a transfer of property is considered part of the divorce or a taxable gift

This is one of the reasons why many people in New York work with a legal team who can coordinate with financial professionals before finalizing the agreement.

When You Should Speak with a New York Family Law Lawyer

You may want to reach out to a New York family law lawyer if:

• You and your spouse share significant assets or complex investments
• There are disagreements about custody, child support, or spousal support
• You’re concerned about future tax consequences of the settlement

Even if you’re working through an uncontested divorce, having a clear, well-structured agreement is key to avoiding surprises—especially when the IRS is involved.

FAQs About Divorce and Taxes in New York

Q: Can I claim my child as a dependent?

A: Only one parent can claim a child for tax purposes. This is usually the custodial parent (the one the child lives with most of the year), unless otherwise stated in the divorce decree or a separate court order.

Q: What happens if we file taxes jointly during the year of divorce?

A: If you’re still legally married on December 31 of the tax year, you may choose to file jointly—even if the divorce is still in progress. This may result in tax benefits but could also impact your refund or liability. Many couples address this in their separation agreement to avoid disputes later.

Q: Are legal separation and divorce treated the same for tax purposes?

A: No. If you’re legally separated under a court-approved separation agreement, you may be considered unmarried for tax filing purposes. However, simply living apart without a formal agreement doesn’t change your marital status for tax purposes.

Q: Do I have to pay taxes on a lump-sum divorce settlement?

A: If the lump-sum payment represents equitable distribution of property, it is generally not taxable. However, if any portion reflects spousal support—even in lump-sum form—it could carry tax consequences depending on the divorce date and agreement terms.

Q: Who pays taxes on investment income after the divorce?

A: After the divorce is finalized and assets are divided, each spouse is responsible for paying taxes on income generated by the property they now own. For example, if your spouse is awarded a rental property, they’ll be responsible for future rental income. If you receive stocks, you’ll inherit the original cost basis, and may owe capital gains taxes when you sell.

Protect Your Finances During and After Divorce

A divorce settlement isn’t just about dividing property—it’s about laying the groundwork for your financial future. When the tax consequences of spousal support, child support, and asset transfers aren’t carefully considered, the outcome can cost you more than you expected.

At Hedayati Law Group, P.C., we take a strategic approach to every divorce case. Whether you’re working through a marital settlement agreement or trying to understand the tax impact of property division, our attorneys are here to offer clarity and guidance rooted in New York law.

If you’re searching for trusted Garden City, NY divorce lawyers, our team is ready to support you with the legal insight you need. Call (516) 334-4100(516) 334-4100 or fill out our confidential online form to schedule your free consultation. We’ll work with you to protect your rights so you can move forward with confidence.

Copyright © 2025. Hedayati Law Group, P.C.  All rights reserved.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.

Hedayati Law Group, P.C.
666 Old Country Road, Suite 444
Garden City, NY  11530
(516) 334-4100(516) 334-4100
https://www.hedayatilaw.com/