How to File Taxes When Going Through a Divorce

Divorce alters an individual’s financial landscape, and understanding its tax implications is important. Dissolving a marriage introduces complexities to tax filing, requiring accuracy and compliance. Navigating these changes helps avoid tax issues and maximize benefits during a personal transition. Proper tax planning during divorce is important for managing financial responsibilities.

Choosing Your Filing Status

Your filing status for a tax year depends on your marital status as of December 31st. Even if you separate, your marital status on that date determines your options. Selecting the appropriate filing status impacts your tax liability, standard deduction, and eligibility for certain credits.

If you are legally married on December 31st, you have two filing status options: Married Filing Jointly or Married Filing Separately. Filing jointly means you and your spouse report combined income, deductions, and credits. This status often provides the lowest tax liability for married couples, but both parties are jointly and severally liable for any tax due.

Married Filing Separately allows each spouse to file their own tax return, reporting only individual income, deductions, and credits. While this option often results in a higher overall tax liability compared to filing jointly, it can be beneficial for meeting certain deduction thresholds. This status also limits one spouse’s liability for the other’s tax errors or omissions.

The Head of Household filing status may be an option if you are unmarried, or considered unmarried, on December 31st and meet criteria. To qualify, you must have paid more than half the cost of keeping up a home, and a qualifying person must have lived with you for more than half the year. A qualifying person is typically a dependent child. This status offers a more favorable standard deduction and tax rates than filing as Single.

You are considered unmarried if you lived apart from your spouse for the last six months of the tax year, paid more than half the cost of keeping up your home, and your home was the main home of your child, stepchild, or foster child for more than half the year. If your divorce is finalized by December 31st, you will file as Single. The Single filing status applies to individuals who are unmarried or legally separated on the last day of the tax year.

Claiming Dependents and Related Tax Benefits

Determining which parent can claim a child as a dependent is a common point of contention during divorce. The Internal Revenue Service (IRS) applies the “custodial parent” rule for dependency exemptions. The custodial parent is the parent with whom the child lived for the greater number of nights.

The non-custodial parent can claim the child as a dependent if the custodial parent signs Form 8332. The non-custodial parent must attach a copy of this signed form to their tax return each year they claim the child.

Claiming a dependent impacts eligibility for several tax credits. The Child Tax Credit provides a credit for each qualifying child under age 17. The Credit for Other Dependents may be available for dependents who do not qualify for the Child Tax Credit.

The Earned Income Tax Credit (EITC) is a refundable tax credit for low- to moderate-income individuals and families, and the amount of the credit can increase with qualifying children. While the dependency exemption can be transferred via Form 8332, eligibility for the EITC and the Child and Dependent Care Credit remains with the custodial parent. The Child and Dependent Care Credit helps offset expenses paid for the care of a qualifying person to enable work or job searching.

While one parent may claim the dependency exemption, other related tax benefits are tied to the custodial parent’s filing status and residency with the child. Clear communication and agreement on who will claim which benefits are important to avoid disputes and ensure proper filings. A divorce decree or separation agreement can specify which parent will claim the child in certain years, but Form 8332 is still required for the non-custodial parent to claim the exemption.

Tax Implications of Financial Agreements

Divorce agreements include financial support and property division, with distinct tax implications. The tax treatment of alimony, also known as spousal support, depends on when the divorce or separation agreement was executed. For agreements executed on or before December 31, 2018, alimony payments are deductible by the payer and taxable income to the recipient.

However, for divorce or separation agreements executed after December 31, 2018, the tax treatment of alimony changed. Such payments are neither deductible by the payer nor taxable to the recipient. This change affects post-2018 agreements, even if they modify pre-2019 agreements, unless the modification retains the old tax treatment. To qualify as alimony under pre-2019 rules, payments must be made in cash, not designated as child support, and cease upon the recipient’s death.

Child support payments, regardless of the date of the divorce or separation agreement, are treated differently from alimony. Child support is neither taxable income to the recipient nor deductible by the payer. Child support is intended solely for the child’s welfare.

The transfer of property between spouses or former spouses incident to divorce is a non-taxable event. No gain or loss is recognized on the transfer if it occurs within one year after the marriage ends or is related to the divorce. The recipient spouse takes the property with the same basis (original cost for tax purposes) that the transferring spouse had. For example, if a house is transferred, the recipient spouse assumes the original purchase price as their basis.

When a primary residence is sold as part of a divorce, the home sale exclusion rules apply. Gain from the sale of a primary residence can be excluded if owned and used as a main home for at least two of the five years preceding the sale. Joint filers can exclude a larger amount. In a divorce, if one spouse moves out but the other continues to live in the home, the departing spouse may still be able to claim the exclusion if they meet the use test via the remaining spouse.

Transfers of retirement accounts incident to divorce require a Qualified Domestic Relations Order (QDRO). A QDRO is a legal order that allows for the division of retirement plan assets without tax consequences or penalties. Without a QDRO, early withdrawals or transfers from retirement accounts can result in taxes and penalties. Other investment accounts transferred as part of the divorce retain the original basis; capital gains or losses are recognized upon sale.

Preparing and Submitting Your Divorce-Related Tax Return

Once decisions regarding filing status, dependent claims, and financial agreements have been made, the next step is preparing and submitting your tax return. Careful organization of all relevant documents ensures accurate reporting. Beyond standard tax forms, specific divorce-related documentation is needed.

Documents include your divorce decree or separation agreement, outlining financial arrangements and property division. If applicable, you will need Form 8332 if claiming a child as a dependent. For retirement account transfers, a QDRO copy is required. These documents provide the basis for tax positions.

Before submission, carefully review your tax return for accuracy, paying attention to divorce-impacted sections. Double-check your chosen filing status, ensuring alignment with your December 31st marital status and criteria. Verify correct reporting of all income, deductions, and credits, especially those related to alimony, child support, or property transactions. An error in these areas could lead to processing delays or correspondence from the tax authorities.

You have several options for submitting your tax return. Electronic filing (e-filing) is the fastest and most secure method, via commercial software or a tax professional. E-filing offers instant confirmation and faster refund processing. Alternatively, you can submit a paper return by mail, though paper returns take longer to process.

In some cases, a previously filed tax return may need to be changed due to a divorce-related issue. To amend a prior return, file Form 1040-X. Processing amended returns takes several weeks. File an amended return within three years of filing your original return or two years of paying the tax, whichever is later.

Maintaining records of all divorce-related tax documents is important for future reference and audits. Keep copies of your divorce decree, Form 8332, QDROs, settlement agreements, and all filed tax returns for at least three years from filing or two years from paying the tax, whichever is later. This record-keeping protects you from tax authority questions or discrepancies.