divorce changes more than just your daily life—it also affects your financial situation, including your taxes. Many people don’t realize how their filing status, deductions, and income reporting shift after a divorce. If you’re not prepared, you may face unexpected tax liabilities or miss out on potential benefits. The good news is that with the right information, you can avoid costly mistakes. Understanding how divorce impacts your taxes allows you to make informed decisions that support your financial stability both now and in the future.
Filing Status Post-Divorce
Your filing status depends on your marital status as of December 31. If your divorce is finalized by the end of the year, you can no longer file jointly. Instead, you will file as either Single or, if you qualify, Head of Household. Head of Household status provides a higher standard deduction and lower tax rates but requires that you pay more than half the cost of maintaining a home for a qualifying dependent. If your divorce is not final by year’s end, you may still file jointly or separately as a married person, depending on your circumstances.
Division of property and Potential Tax Consequences
Dividing assets in a divorce involves more than deciding who gets what—it also has tax implications. In most cases, transfers of property between spouses during a divorce are not subject to immediate taxes. However, the tax basis of an asset remains the same, which can lead to capital gains taxes later when the asset is sold.
For example, if one spouse keeps the family home, they may face a significant capital gains tax when selling it in the future, depending on how much the property has appreciated. Retirement accounts also require careful handling. Transferring funds from a 401(k) or IRA typically requires a Qualified Domestic Relations Order (QDRO) to avoid penalties.
Understanding the long-term tax impact of property division can help you make informed decisions. What may seem like an equal split now could have very different financial consequences down the road, so it’s important to review these details carefully.
Tax Treatment of Spousal Maintenance and child Support
Spousal maintenance (alimony) and child support serve different purposes, and the IRS treats them differently for tax purposes. If your divorce agreement was finalized in 2019 or later, spousal maintenance payments are not deductible for the paying spouse, and the receiving spouse does not report them as taxable income. This is a change from previous rules, where spousal maintenance was deductible by the payer and taxable to the recipient. If your divorce was finalized before 2019, the old tax rules may still apply unless your agreement was modified.
Child support payments have always been tax-neutral. The paying parent cannot deduct them, and the receiving parent does not count them as taxable income. Unlike spousal maintenance, child support is strictly meant for the child’s care, so the IRS does not treat it as income.
Claiming Dependents and Related Tax Credits
After a divorce, only one parent can claim a child as a dependent for tax purposes. In most cases, the custodial parent—the one the child lives with for most of the year—has the right to claim the child. However, the custodial parent can release this claim to the non-custodial parent by signing IRS Form 8332.
Claiming a dependent can provide valuable tax benefits, including the Child Tax Credit and potential education-related credits. Since these credits can significantly impact a tax return, it’s important to clarify in the divorce agreement who will claim the child each year.
Adjusting Tax Withholding and Estimated Payments
Divorce often changes your income and tax liabilities, making it essential to update your tax withholding. If you were previously filing jointly, your tax bracket may shift, affecting how much you owe. To avoid surprises at tax time, update your Form W-4 with your employer to reflect your new filing status and any changes in dependents.
If you receive spousal maintenance (from pre-2019 agreements) or have other untaxed income, consider making estimated tax payments to the IRS. This can help prevent penalties for underpayment and ensure you meet your tax obligations throughout the year without a large bill in April.
Planning Ahead for a Smoother Tax Season
Divorce brings many financial changes, and understanding the tax impact can help you avoid costly mistakes. At Cohen Family Law, we guide clients through the legal and financial aspects of divorce. If you have questions about your situation, contact us today to discuss how we can help you move forward.
