When you’re facing a divorce, every decision you make feels like it carries lasting consequences – and many of them do. Beyond your property division and child custody arrangements, one of the most complex yet often overlooked areas involves taxes and their implications.
Although divorce lawyers can’t and should not provide tax or financial advice, we can advise you of tax considerations that commonly arise in divorce cases, and what they can mean for you from a family law perspective.
Filing Status and Timing
Your marital status on December 31 of any given year determines how you will file taxes for that year. This can have significant consequences for your financial picture after your divorce. Whether you’re considered married or single on the last day of the year can influence your tax bracket, your deductions, who claims the kids, and even your tax liability.
If your divorce is finalized on or before December 31, you will typically file as single or possibly as head of household if you meet the criteria.
If you’re still legally married on that date, you can file as married filing jointly or married filing separately. While joint filing has benefits, such as a higher standard deduction, it also comes with shared liability. If one spouse owes taxes, the other can also be held responsible.
From a family law perspective, the timing of your divorce can carry financial ripple effects now and into the next tax year. Discussing filing status early in your settlement negotiations helps ensure that both parties know what to expect – and it prevents unpleasant surprises when April arrives.
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Alimony, Child Support, and Dependent Exemptions
Support payments and dependency claims often create confusion after a divorce, especially since tax rules have changed in recent years. Whether a payment counts as taxable income or a deduction depends largely on when your divorce was finalized and how your agreement is written.
Alimony (Spousal Support)
Under the Tax Cuts & Jobs Act (TCJA):
- For divorces finalized before January 1, 2019, alimony payments are generally tax-deductible for the payer and taxable income for the recipient.
- For divorces finalized on or after January 1, 2019, alimony is no longer deductible for the payer and not taxable for the recipient. This also includes support payments that were modified after that date.
Although many provisions in the TCJA are temporary and set to sunset, the alimony rule change is considered permanent.
Child Support
Child support is neither deductible by the paying parent nor taxable to the receiving parent. Because of this, parties should focus on ensuring that child support truly reflects the child’s needs, rather than worrying about any tax implications.
Dependency Exemptions and Tax Credits
The custodial parent typically claims the child for tax purposes. Parents can, however, agree to transfer the exemption or other credits to the non-custodial parent using IRS Form 8332. Your divorce decree should be clear about who claims which child and in what year to prevent future disputes.
Properly labeling support payments and clarifying dependency rights within the settlement agreement and divorce order are essential steps in family law. When both sides understand how taxes interact with these payments, negotiations can focus on achieving financial balance instead of unintended tax consequences.
Division of Marital Assets and Hidden Tax Consequences
Property division can be one of the most emotional and complex aspects of divorce. On top of that, not all assets are created equal from a tax standpoint. Two assets with the same face value can have very different after-tax values.
- Property transfers – Transfers between spouses or “incident to divorce” are generally tax-free under federal law. However, the receiving spouse inherits the same cost basis as the transferring spouse, meaning taxes may arise later when the property is sold.
- Retirement accounts – Retirement accounts like 401(k)s and pensions must be divided carefully. A Qualified Domestic Relations Order (QDRO) allows these transfers without immediate tax or penalty consequences. Without a QDRO, early withdrawals can trigger both income tax and penalties.
- Marital home and appreciated assets – The sale of the marital home can trigger capital gains taxes depending on ownership and residency. If one spouse keeps the home, they may face taxes later if they sell, while they no longer qualify for the larger “married filing jointly” exclusion.
If the parties agree to keep the home and sell it later, and one spouse moves out, after the divorce, the spouse who moved out may no longer qualify for any deductions on the capital gains taxes.
In family law negotiations, attorneys must work to ensure that asset division is equitable, but this requires more than a dollar-for-dollar split. Considering the after-tax value of each asset helps create a settlement that’s truly fair in practice, not just on paper.
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Tax Liabilities, Withholding, and Past Returns
Divorce doesn’t just divide assets. It also divides liabilities, which can include tax liabilities. Couples who previously filed jointly may face questions about unpaid taxes, refunds, or potential audits. Managing these issues early can prevent future conflict and financial liability.
- Joint returns and liability – When spouses file jointly, both are generally responsible for the total tax owed, even if only one of them earned the income. This means that any underreporting or unpaid taxes can affect both parties, regardless of who is responsible for the issue.
- Innocent Spouse Relief – Fortunately, the IRS provides limited relief for individuals who can prove they were unaware of their spouse’s tax errors, but this is not automatic and only applies in very limited circumstances.
- Withholding and estimated payments – Once separated, each spouse should adjust their tax withholding to reflect their individual income and support obligations. Changes in support, employment, or custody can all impact the amount of tax owed throughout the year, and it is a good idea to lower your withholdings to account for any surprises.
Addressing tax liabilities during the divorce with a qualified financial professional helps spouses ensure a clean break. Settlements can specify who is responsible for any past debts or refunds, preventing one spouse from being blindsided later. Good documentation now can save years of financial frustration later on.
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State Tax and Local Considerations
While federal tax law applies nationwide, each state has its own tax rules that can impact your divorce settlement. Understanding how your state treats income, property transfers, and support payments will help you anticipate what comes next.
- Some states, like Texas and Florida, do not have a state income tax, while others, like Virginia and South Carolina, do. This can affect support calculations and take-home pay.
- Certain states treat alimony differently for income tax purposes, even if federal law no longer does.
- Property transfer or recordation taxes may apply when real estate changes hands between divorcing spouses as well as refunds on any local tax and insurance escrows.
- Each state also has unique residency rules that can affect filing status and dependency credits.
Because divorce settlements often involve multiple financial layers, awareness of both federal and state rules is crucial. Your family law attorney can help identify when to involve a tax professional to ensure all state and federal obligations are met before finalizing your decree.
Important Questions to Consider at Tax Time
Although divorce is a highly emotional time, it’s also essential to think strategically, especially at tax time. Asking the right questions during the process can prevent tax complications later and help your agreement stand the test of time.
Consider:
- Have you reviewed recent tax returns for hidden issues or liabilities?
- Are support payments clearly labeled to avoid IRS confusion?
- Who will claim each child for tax purposes, and is this spelled out in the decree?
- Are you aware of the after-tax value of each asset being divided?
- Does your settlement language specify who is responsible for any tax debts or refunds?
- Have you updated your tax withholding forms?
When family law attorneys and clients take the time to address these issues, it can clarify each party’s financial obligations and ensure fair asset division. It also prevents future misunderstandings that could end up back in court.
The Bigger Picture: Planning for a Stable Future
Divorce marks both an ending and a beginning. Beyond its emotional transition, it’s also an opportunity to intentionally rebuild your financial foundation.
This is why it’s important to remember that:
- Poorly structured or rushed settlements often lead to unintended financial consequences years later.
- Failing to address tax issues now can result in uneven financial burdens.
- Proactively coordinating between your attorney and a tax professional helps ensure that every aspect of your agreement works in your favor over time.
While your attorney isn’t authorized to give tax advice, this is an essential reminder that divorce and tax law are deeply intertwined. Leaning on trusted professionals – your attorney, your CPA, and your financial advisor – helps keep you informed as you make decisions that can affect your long-term financial health.
At Melone Hatley, P.C., our experienced family law attorneys are on your side each step of the way, legally, emotionally, and financially. We welcome working with financial professionals to ensure our clients’ best interests are thoroughly protected. We understand how overwhelming divorce is and how important it is to have the right professional support. Contact us online or call us at (800) 479-8124 to schedule a free consultation with one of our Client Services Coordinators.
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