To give you an example of the Gay Divorce Tax , consider what happens when splitting a retirement account. Eric and John are both 50 years old and are breaking up. As part of the divorce, they need to split a $500,000 401k that is in Eric’s name. If they were straight, they could do QDRO (Qualified Domestic Relations Order) and relatively easily split the 401k in half. Both would end up with $250,000 each in a retirement account. But the QDRO wouldn’t be available for Eric and John. To pass the money from Eric to John, first they are subject to the Gay Divorce Tax.
Eric would have to take a taxable withdrawal from his 401k. The $250,000 would be subject to income taxes and penalties that could be 33% or more. It could include a 10% premature distribution penalty, state income taxes of 9.3% in California, and it may be subject to gift taxes as well. If the divorcing couple proceeded this way, Eric could be hit with tax bill of $75,000 or more before even dealing with gift tax issues. Also, keep in mind that the leftover money that John does receive will no longer be in a tax-deferred retirement account such as an IRA or 401k, and there aren’t options to quickly get large amounts back into tax deferred accounts.
The Gay Divorce Tax is just one reason same-sex couples need to talk about divorce.