Divorce Tax Return: How to Handle Taxes During and After Divorce

Divorce complicates many aspects of life, including taxes. Changes in filing status, deductions, and financial responsibilities impact tax liability. Handling these adjustments properly prevents unexpected tax bills and missed savings opportunities.

Understanding tax considerations during and after divorce ensures compliance with IRS rules while reducing financial strain.

Filing Status Options

Choosing the correct filing status affects tax liability. The IRS recognizes five filing statuses, but the most relevant for divorcing individuals are Married Filing Jointly, Married Filing Separately, Head of Household, and Single. Your status depends on your marital status as of December 31 of the tax year. If your divorce is finalized by that date, you cannot file jointly and must select either Single or Head of Household if eligible.

Married Filing Jointly often results in lower tax rates and a higher standard deduction, but both spouses share responsibility for any tax liability. If one spouse underreports income or claims improper deductions, the other may be held accountable unless they qualify for IRS innocent spouse relief. Some choose Married Filing Separately to avoid this risk, though this status generally leads to higher tax rates and disqualifies filers from certain credits, such as the Earned Income Tax Credit (EITC).

Head of Household status provides a higher standard deduction and more favorable tax brackets than Single status. To qualify, you must pay more than half the cost of maintaining a home for a qualifying dependent, such as a child. Eligibility depends on living arrangements and financial support, which can become points of contention in divorce proceedings.

Alimony and Child Support Reporting

The tax treatment of alimony changed with the Tax Cuts and Jobs Act (TCJA). For divorce agreements finalized on or after January 1, 2019, alimony payments are no longer deductible for the payer or taxable for the recipient. Pre-2019 agreements follow the old rules, where alimony was deductible for the payer and taxable for the recipient. If a pre-2019 agreement is modified, the updated terms determine which tax rules apply.

Child support has never been tax-deductible for the payer or taxable for the recipient. Misclassifying payments can lead to IRS scrutiny. If payments decrease when a child reaches a certain age or milestone, the IRS may reclassify them as child support, potentially resulting in penalties and back taxes.

To comply with IRS rules, alimony payments must be made in cash or equivalent (such as checks or bank transfers) and must cease upon the recipient’s death. Voluntary payments outside a formal agreement do not qualify as alimony for tax purposes.

Allocating Dependents and Credits

Determining who claims a child as a dependent affects tax benefits. The IRS generally grants this right to the custodial parent—the one with whom the child resides for more than half the year. However, parents can transfer the dependency exemption to the noncustodial parent using Form 8332, which must be signed and attached to the tax return each year the exemption is claimed. This transfer is often negotiated in divorce settlements, particularly when one parent has a higher income and benefits more from tax credits.

The Child Tax Credit (CTC) provides up to $2,000 per qualifying child under age 17, with up to $1,600 refundable in 2024. Only the parent claiming the dependent can receive this credit. The Additional Child Tax Credit (ACTC) allows lower-income parents to receive a refund even if they owe no taxes. The Earned Income Tax Credit (EITC) is strictly limited to the custodial parent and cannot be transferred. If both parents attempt to claim the same child, the IRS may audit their returns or delay processing.

The Dependent Care Credit helps offset childcare costs and is available only to the custodial parent. It covers up to 35% of qualifying expenses, with a maximum credit of $1,050 for one child or $2,100 for two or more. Eligible expenses include daycare, after-school programs, or in-home care, provided the parent is working or seeking employment. Unlike the CTC, this credit is not transferable, making it a key factor in custody negotiations.

Addressing Unfiled Returns

Failing to file tax returns can lead to penalties, loss of refunds, and IRS scrutiny. The failure-to-file penalty is 5% of the unpaid tax per month, capped at 25%, while failure-to-pay penalties add another 0.5% per month. If returns remain unfiled for over a year, the IRS may file a Substitute for Return (SFR) using available income data, often resulting in a higher tax liability due to the exclusion of deductions or credits the taxpayer may have qualified for.

To resolve unfiled returns, obtain tax transcripts from the IRS, which provide wage and income data reported by employers and financial institutions. If a former spouse was responsible for filing jointly but failed to do so, the other party may still be liable for any resulting taxes unless they qualify for Innocent Spouse Relief or Separation of Liability Relief. If one spouse concealed income or failed to pay taxes, filing separately for prior years may be advisable, though only if the returns have not yet been submitted.

Tax Treatment of Retirement Account Division

Dividing retirement assets in a divorce requires careful tax planning to avoid penalties and unexpected liabilities. The tax implications depend on the type of retirement account and the method used to transfer funds.

For 401(k)s and pensions, a Qualified Domestic Relations Order (QDRO) is required to divide assets without triggering immediate taxation. A QDRO allows the receiving spouse to roll over their portion into an IRA or another qualified plan without penalties. Without a QDRO, any distribution made to the original account holder is considered taxable income, and if they are under 59½, an additional 10% early withdrawal penalty may apply. The recipient spouse can take a direct distribution from the QDRO without the penalty, though standard income taxes will still apply unless the funds are rolled over.

For IRAs, a QDRO is not required, but transfers must be structured as a trustee-to-trustee transfer under the divorce decree. If the account holder withdraws funds and then transfers them to their ex-spouse, the IRS treats it as a taxable distribution. Roth IRAs follow similar rules, but since contributions are made with after-tax dollars, qualified distributions remain tax-free. Properly structuring these transfers preserves tax advantages and prevents unnecessary penalties.

Handling Past-Due Balances

Unpaid tax liabilities from prior years can complicate post-divorce finances, especially if one spouse was responsible for managing tax payments. When a couple files jointly, both individuals are legally liable for any outstanding tax debt, regardless of who earned the income.

To resolve past-due balances, divorced individuals can apply for Innocent Spouse Relief, which absolves one party of liability if they were unaware of errors or omissions on a joint return. Another option is an Installment Agreement, allowing taxpayers to pay off their debt over time. If financial hardship is a concern, an Offer in Compromise may enable a reduced settlement amount. The IRS can garnish wages or levy bank accounts if balances remain unpaid, making it important to address these issues promptly.

If one spouse agreed to take responsibility for tax debts in the divorce settlement, the IRS does not recognize this arrangement as binding. The agency will still pursue both individuals for payment unless relief is granted. Negotiating tax debt settlements as part of the divorce proceedings helps ensure liabilities are divided fairly and that both parties understand their obligations.