Divorce and Taxes: What You Should Know

Understanding the tax implications of divorce and how they affect you following the entry of your divorce decree is critical. Filing a divorce can add complexities to your tax situation. Get help navigating your new financial landscape with the guidance of an experienced divorce lawyer in your area.

Understanding Your Filing Status Post-Divorce

Your filing status has several implications relating to your tax situation. It determines the following:

• Your filing requirements
• Your standard deduction
• Eligibility for certain tax credits
• Eligibility for certain tax deductions

Your marital status as of December 31 determines your filing status for tax purposes.

• Separated but not divorced or legally separated by the end of the year. A married couple that is only separated, not divorced, or legally separated by the end of the tax year is considered married for filing purposes. The IRS considers you married until your divorce is final or you receive a court order for separate maintenance.
• Legal separation or a divorce by the end of the year. For couples who experience a legal separation or a divorce by the end of the year, you cannot file a joint return. You must file as single for that year regardless of when during the year your divorce or legal separation was finalized. Or, if you meet the requirements, you may file with the head of the household status.
• Divorced during the year but remarried by the end of the tax year. If you remarry by the end of the tax year, you may file a joint return. You must file as married if you’re legally married at the end of the year by choosing one of the married statuses—married filing separately or a joint tax return.

In some instances, married couples who file jointly enjoy certain tax benefits on their joint tax return. Some benefits are unavailable upon legal separation or divorce. You and your former spouse must decide how to handle any tax refund or liability due on a tax return for previously filed joint tax returns.

Alimony Payments and Tax Deductions

You may qualify for alimony payments (or separate maintenance) in some states. These are payments made to a spouse under a separation or divorce agreement. The particular details of your agreement determine the tax consequences of those payments.

For agreements signed in 2019 or later, alimony payments are not deductible on the providing party’s tax return or included in the receiving party’s income. A tax professional will be able to help you understand any tax liability.

Tax Implications of Asset Division

During your divorce settlement, you may need to divide assets. Luckily, divorce-related property transfers are not typically considered a taxable event. Transfers between spouses or former spouses do not involve recognized gain or loss.

However, some assets can come with the possibility of capital gains liability when sold. For example, if you bought a portfolio of stocks for $50,000 during the marriage, but at the time of the divorce, they are worth $150,000. When you liquidate the portfolio, the IRS would consider $100,000 as capital gains.

Asset Division Following Dissolution of Marriage or Legal Separation

The division of assets will depend on any pre- or post-nuptial agreement you may have. Your state also determines the property distribution. If you live in a community property state, your earnings during marriage and any assets acquired will generally be split 50/50. In other states, the division will proceed equitably, which is not necessary equally.

Retirement Accounts

Certain assets, such as retirement accounts and pensions, are subject to taxes and penalties if the spouses attempt to divide the assets. If you’re entitled to a portion of your ex-spouse’s account balance, you can benefit from a qualified domestic relations order (QDRO). A QDRO can prevent unnecessary taxes and penalties.

The payments received under a QDRO may become taxable income unless they are rolled over into a traditional IRA and meet certain conditions. Amounts included in your income are not subject to the 10% federal tax penalty for early distribution.

Child Support and Tax Exemptions

Child Support

Child support payments are relatively straightforward. Child support is not considered taxable income or eligible for a tax deduction for the taxpayer making the payments.

Tax Exemptions

Only one person can claim a child as a dependent after a divorce. In general, only one parent can claim the child as a qualifying child for purposes of the following:

• Head of household filing status
• The child tax credit
• Credit for other dependents
• The dependent care credit
• The exclusion for dependent care benefits
• The dependency exemption
• The earned income tax credit

For IRS purposes, the custodial parent is the one who keeps the child overnight for the most number of nights during a year. The general rule is that noncustodial parents cannot claim the dependent and child care credit on their tax return. However, there are exceptions based on custody agreements and IRS rules.

The parties may agree (or the court may order) the custodial parent to submit an IRS Form 8332, which would release their claim to the dependency exemption. For example, this could make sense if the noncustodial parent is in a higher tax bracket than the custodial parent.

If your ex claims your child on their tax return as a noncustodial parent and they do not have a right to claim the child as a dependent, you should seek tax advice from a professional.

Navigating Tax Law Changes After Divorce

Just like any legislation, tax laws are subject to change. For example, before the Tax Cuts and Jobs Act of 2017 (TCJA), alimony payments were tax-deductible, and the person receiving the alimony had to report the payment as income on their federal tax return. Today, such agreements dated January 1, 2019, or later are not tax-deductible by the person paying alimony and do not have to be reported as income by the receiving party.

Speak with an experienced local divorce lawyer to discuss tax law changes that may impact you and any other legal questions relating to your divorce.