Tax Implications of Divorce: What You Need to Know
Divorce brings major changes to your tax situation. From your filing status to who claims the children, understanding these tax implications can help you make better financial decisions during and after the divorce process.
Filing Status After Divorce
Your marital status on December 31 determines your filing status for the entire year. If your divorce is finalized by December 31, you file as Single or Head of Household. If still married on December 31, you must file as Married Filing Jointly or Married Filing Separately.
Who Claims the Children?
- The custodial parent (who the child lives with more than half the year) claims the child
- The custodial parent gets the Child Tax Credit and Head of Household status
- The non-custodial parent can claim the child if the custodial parent signs Form 8332
- Only one parent can claim each child in a given tax year
Alimony and Taxes
For divorce agreements executed after December 31, 2018, alimony is not deductible by the payer and not taxable to the recipient. Older agreements follow the prior rules where alimony is deductible by the payer and taxable to the recipient.
Property Division
Transfers of property between spouses as part of a divorce are generally not taxable events. However, the receiving spouse takes over the original cost basis, which matters when they eventually sell the property. Be aware of the tax implications of any assets you receive.
Retirement Account Splits
Retirement accounts can be divided in divorce using a Qualified Domestic Relations Order (QDRO) for employer plans, or a direct transfer for IRAs. These transfers are not taxable if done correctly. Rolling the funds into your own IRA preserves the tax-deferred status.
