From your filing status to alimony treatment and who claims the kids, the tax decisions you make in the year of your divorce, and the years that follow, can have a real impact on your finances. JBS provides tax services to individuals navigating major life changes like divorce, and we want to help you understand what to expect before you sit down to file.
Key Points
- Your filing status for the entire tax year is determined by your marital status on December 31, which affects your tax rates, standard deduction, and eligibility for certain credits.
- The tax treatment of alimony, child support, and dependent claims changed significantly with the Tax Cuts and Jobs Act of 2017, and the rules depend on when your divorce was finalized.
- Dividing assets like retirement accounts and real estate can trigger tax consequences that are easy to overlook without proper planning.
Your Filing Status Changes Everything
The IRS considers you married or unmarried for the entire tax year based solely on your status as of December 31. If your divorce was finalized on December 30, you are considered single for that entire tax year, even if you were married for 99.99% of it.
Most newly divorced individuals will file as Single. However, if you have a qualifying child living with you and you meet certain requirements, you may be eligible to file as Head of Household, which comes with a higher standard deduction and lower tax rates. This distinction matters, so it is worth confirming your eligibility before filing.
Alimony: The Rules Depend On When You Divorced
This is one of the most misunderstood areas of post-divorce taxes. Under the Tax Cuts and Jobs Act of 2017, the rules for alimony changed dramatically for divorces finalized after December 31, 2018.
Divorces Finalized in 2019 or Later
For anyone whose divorce was finalized in 2019 or later, alimony payments are no longer deductible for the paying spouse and are not considered taxable income for the receiving spouse. This is a significant departure from the prior rules and catches many people off guard.
Divorces Finalized Before 2019
If your divorce agreement was executed before January 1, 2019, the old rules still apply, alimony is deductible for the payer and taxable income for the recipient. However, if you modify your pre-2019 divorce agreement, the new rules may kick in depending on how the modification is written. As always, it’s best to speak with a professional about your specific situation.
Additionally, child support is treated differently from alimony under all scenarios. It is never deductible for the payer and never taxable for the recipient.
Who Claims The Children?
Generally, the custodial parent, meaning the parent the child lives with for the greater part of the year, has the right to claim the child as a dependent. This matters because it determines who can claim the Child Tax Credit, the Child and Dependent Care Credit, and potentially Head of Household filing status.
That said, the custodial parent can sign IRS Form 8332 to release the exemption to the noncustodial parent. This is sometimes negotiated as part of a divorce settlement. If you are sharing custody or alternating who claims the child each year, make sure your divorce decree spells this out clearly and that both parties understand how it works at tax time. Disputes over dependent claims are one of the most common issues the IRS flags when reviewing returns.
Dividing Retirement Accounts And Property
Splitting a retirement account in a divorce requires a specific court order called a Qualified Domestic Relations Order (QDRO). When done correctly, transfers between spouses as part of a divorce settlement are not taxable events. However, if you cash out a retirement account instead of rolling it over, you will owe income tax and potentially a 10% early withdrawal penalty.
The same principle applies to the family home. Transfers of property between spouses incident to divorce are generally not taxable at the time of transfer, but the receiving spouse takes on the original cost basis. That becomes relevant if the home is sold later and a capital gains calculation is needed. JBS provides tax services to real estate investors and homeowners navigating these transitions, and our team can help you think through the long-term tax picture.
Updating Your Withholding
After a divorce, your tax situation has changed, your income, filing status, and deductions are all different now. If you are a W-2 employee, updating your Form W-4 with your employer is an important step to make sure the right amount of federal tax is being withheld from your paychecks. Under-withholding can lead to an unexpected bill (and possibly a penalty) come April.
If you are self-employed or a freelancer, JBS provides tax services to freelancers and can help you recalculate your estimated quarterly payments to reflect your new circumstances.
Working With A Tax Professional After Divorce
The year of a divorce, and often the year or two after, tend to be the most complicated from a tax standpoint. Our team at JBS works closely with individuals going through major life transitions to make sure nothing falls through the cracks. Whether you have questions about your filing status, need help understanding your divorce decree from a tax perspective, or want to plan ahead for next year, we are here to help. You can explore more resources on our blog or contact our team to get started.
Note: This article is for educational purposes only and does not constitute tax advice. Tax rules, figures, and percentages are subject to change and this article may not be fully up to date; visit IRS.gov for the most current information and consult a tax professional for guidance specific to your situation.
