Most divorces involve tax consequences of some sort. Though every situation is different, there are some common issues that may come up in this context for you and your soon-to-be ex-spouse. Talking to a knowledgeable divorce attorney can help you to understand the tax implications of your divorce agreement.
The information on this page refers to federal tax law. State tax law may differ.
One of the primary ways in which a divorce will affect your taxes involves your filing status. The IRS offers the option for married couples to file a joint tax return. However, couples may not file jointly for the tax year in which their divorce was finalized, even if their divorce was finalized on December 31. A tax specialist may be helpful in evaluating the potential tax advantages of coordinating a couple’s final divorce date. A divorcing couple who files jointly will share equally in the tax liability or refund due, so divorcing spouses should agree on responsibility and division before filing.
Transfers of Property
Transfers of property “incident” (related) to divorce are viewed as tax-neutral under IRC Section 1041. Section 1041 protects spouses from tax consequences that would otherwise occur when transferring property from one individual to another. Ex-spouses may also benefit from this rule if the transfer is incident to divorce. A transfer of property is incident to divorce if it occurs within one year after the final divorce date or is otherwise related to the cessation of the marriage. A transfer otherwise related to the cessation of the marriage is generally a transfer that is taken into account in a written agreement or order within six years after the couple’s final divorce date. (There may be an exception to the six-year rule in rare circumstances.) Section 1041 applies only to transfers between spouses or ex-spouses, not third parties.
Taxable Status of Alimony
Alimony or spousal support, like child support, is neither taxable to the recipient nor deductible for the payer for payments made under a divorce or separation agreement executed after December 31, 2018. Most alimony payments made in accordance with agreements executed before December 31, 2018 are deductible for the paying ex-spouse and taxable for the receiving ex-spouse, although there may be exceptions. Ex-spouses paying or receiving alimony who are unsure of their tax obligations should consult with a tax specialist or attorney, since tax laws may change.
Claiming Children and Child Support
Similar to alimony, an individual who pays child support is not eligible for a tax deduction, and the individual who receives it will not need to claim the payments as income. Child support may be combined with alimony payments and described as “family support.” This arrangement was more common before 2019, when alimony tax rules required the recipient to claim the payments, including “family support,” as taxable income. Family support has fallen out of favor, and most courts prefer that child support and spousal support be quantified separately.
The parent with whom a child lives for more than half the year will claim that child on their taxes unless this default rule is modified by the divorce agreement.
The other major tax issue in a divorce involving children is who gets to claim the children as dependents and thus benefit from the associated tax credits and deductions. The default rule is whoever the child lives with for more than half the year gets to claim them on their taxes. However, this default can be modified in the divorce agreement. It is crucial to follow all IRS rules about these deductions. Parents who do not have custody of their children for more than half the year but who are nonetheless entitled by the divorce agreement to claim those children as dependents need to file a special form each year with the IRS.
Custodial parents should also be aware of any other tax credits that may be available for them, such as the child care tax credit. Legal fees paid specifically for tax advice during a divorce may also be deductible. An experienced divorce attorney or tax specialist can offer advice tailored to a divorcing couple’s unique situation.
IRS Publication 504 contains more information on tax rules related to divorced or separated individuals.