Retirement Distribution, divorce, and taxes

[icatchem76]

This year I have cashed in the retirement account for a move to Alabama after Katrina and Rita hooked us up. Then we got here and she decided that divorce would be the next major step.  And as part of that after all the moving expenses and bills were paid off, she got her half of what was left.  She ended up with a check from me for around $17K.  Taxes were withheld at the standard 20%, federal and state, when the money was originally disbursed.  As I understand it, because we will be divorced on Dec. 31, we will be filing separately.  She has acknowledged that she is responsible for some of the taxes that are associated with that money.  How do I do that?  When the w-2 or 1099 or whatever is issued to me at the end of the year for the distribution, won't it be solely on me?  How do I transfer some of that burden to her?  Can I issue her a 1099 for the money she got from me and the pre-paid portion of the taxes associated with that sum?  Or would it be better for me to just try and negotiate for claiming both kids on my taxes?  Anybody following this?

I do have it on my to-do list to go and see an accountant sooner than later so there are no surprises, but I thought I would check with you guys first.  I guess I should say too that with some of the Katrina tax breaks there is no penalty on the money for early distribution.

[Lee Borden]

You may be okay. Here are the facts as I understand them:

• You cashed out a retirement plan for your move and then paid your STBX her share of what you received.
• What you received was already cut 20% for taxes.
• As a Katrina victim, you may be entitled to penalty-free withdrawal from your retirement plan.

What this means to me is that, depending on whether penalty-free withdrawal is available to you, you may have already had enough withheld to pay the taxes you are going to owe.

You are correct that you and your STBX will be filing as single taxpayers for 2006 as long as your divorce is effective by December 31, and as long as neither of your remarries before the end of the year.

You cannot and should not try to issue her a 1099. That will confuse the issue. Instead, go ahead and schedule that visit with your accountant BEFORE you sign the divorce documents. If your STBX needs to compensate you for taxes, build it into the separation agreement.

[icatchem76]

Thanks for the comments.  I was aware of the penalty free law on the books now.  I guess I should have asked this question a little sooner though as the papers are signed.  No decree yet though.

This board is great.