How to File Taxes When Going Through a Divorce

The decisions made during a divorce can have lasting financial consequences. Understanding how to address your tax obligations is a part of the separation process that ensures compliance and can minimize financial strain for both parties involved.

Determining Your Filing Status

Your marital status as of midnight on December 31st of the tax year dictates your available filing options for that entire year. If your divorce decree is not final by that date, the IRS considers you married, regardless of whether you are living apart.

For those who are still legally married at the end of the year, the choice is between filing jointly or separately. A Married Filing Jointly (MFJ) return combines both spouses’ incomes, deductions, and credits, which often results in a lower tax bill. However, choosing MFJ means both individuals are jointly and severally liable for the entire tax liability, and the IRS can collect the full amount from either spouse.

The alternative is Married Filing Separately (MFS). With this status, each spouse reports their own income and expenses on a separate return. This severs the joint liability for the tax bill but typically leads to a higher tax payment and disqualifies taxpayers from claiming certain deductions and credits.

A more favorable option, Head of Household (HOH), may be available even if you are still legally married. To qualify, the IRS must consider you “unmarried” for tax purposes. This requires that you lived apart from your spouse for the last six months of the tax year, paid more than half the cost of maintaining your home, and your home was the main residence for a qualifying child for more than half the year.

If your divorce was legally finalized by December 31st, you are considered unmarried for the entire year. Your filing status will be Single, unless you meet the requirements to file as Head of Household.

Handling Dependents, Alimony, and Child Support

The IRS grants the right to claim children as dependents to the custodial parent, defined as the parent with whom the child resided for the greater number of nights during the year. This parent is eligible to claim related tax benefits, such as the Child Tax Credit.

An exception allows the custodial parent to release their claim to a dependent to the non-custodial parent. This is accomplished by signing IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. The non-custodial parent must attach this signed form to their tax return for each year they claim the child. In situations where custody is split exactly 50/50, IRS “tie-breaker” rules award the dependent to the parent with the higher adjusted gross income (AGI).

The tax treatment of alimony payments is dictated by the date of the divorce or separation agreement. For any agreement executed on or before December 31, 2018, the paying spouse can deduct the full amount of alimony paid, and the receiving spouse must report that same amount as taxable income.

Due to the Tax Cuts and Jobs Act of 2017, these rules were reversed for agreements executed after December 31, 2018. Under current law, alimony payments are not deductible for the payer. Correspondingly, the recipient does not include the alimony payments in their taxable income. Couples with pre-2019 agreements can formally modify their agreement to adopt these new rules if they choose.

In contrast to alimony, the tax treatment of child support is consistent. Child support payments are never tax-deductible for the parent who pays them. The parent who receives child support payments does not report them as taxable income.

Addressing Property and Asset Division

The transfer of property between spouses or former spouses, if it is “incident to a divorce,” is not a taxable event. This means no capital gains tax is due at the time of the transfer. The spouse who receives the asset also inherits its original cost basis, which is the price paid for the asset and is used for calculating capital gains tax when the asset is eventually sold.

For example, if one spouse receives stock originally purchased for $10,000 that is now worth $50,000, there is no tax on the transfer. The recipient’s basis in the stock is $10,000. If they later sell the stock for $60,000, they will be liable for capital gains tax on the $50,000 difference.

Tax law allows an individual to exclude up to $250,000 of capital gains from the sale of their main home, and a married couple filing jointly can exclude up to $500,000. If a couple sells their home before the divorce is final, they can use the full $500,000 exclusion on a joint return, provided they meet the ownership and use tests.

After a divorce, special rules may allow both ex-spouses to each claim a $250,000 exclusion. This can apply even if one spouse has moved out of the home. For this to be possible, certain conditions related to ownership and the use of the property as a primary residence by one of the ex-spouses must be met as specified in the divorce decree.

Dividing retirement funds, such as 401(k)s or pension plans, requires a Qualified Domestic Relations Order (QDRO) to avoid immediate taxes and penalties. A QDRO is a court-issued judgment that recognizes a spouse’s right to receive a portion of the benefits from their ex-spouse’s retirement plan. When funds are transferred via a QDRO, the transfer is not subject to early withdrawal penalties, and income tax is deferred until the recipient withdraws the funds.

Information and Forms Needed to File

Gathering all necessary documents beforehand can prevent delays. You will need personal information for yourself, your ex-spouse, and any dependents, including full names, Social Security numbers, and dates of birth. A copy of your final divorce decree or separation agreement is also necessary to verify dates and specific financial arrangements.

You should also collect all standard income forms, such as W-2s from employers and any 1099 forms for other income. If you paid or received alimony under a pre-2019 agreement, you must have records of the amounts. The payer will need the recipient’s Social Security number to deduct the payments correctly. Mortgage interest statements and records of property taxes paid are also needed.

The Tax Filing Process

Disagreements can complicate the filing process. If an ex-spouse refuses to cooperate in filing a joint return, the only option is to file separately using the Married Filing Separately status. If you discover that your ex-spouse has improperly claimed a dependent that you are legally entitled to claim, you should not use e-file. Instead, you must file a paper return, claiming the dependent correctly, and mail it to the IRS, which will then determine which parent has the rightful claim.

After filing a joint return, a separate issue may arise if one spouse becomes aware of tax understatement or underpayment caused by the other. In such cases, the IRS provides a potential remedy known as Innocent Spouse Relief. This process can relieve a person from paying additional tax, interest, and penalties if they can prove they were unaware of the errors and it would be unfair to hold them liable.