Divorce

What Impact Will Divorce Have on My Taxes?

Divorce can be a whirlwind of emotions, and the financial side often feels like one of the heaviest burdens to bear. If you’re wondering how your taxes will change during this transition, take a deep breath—you’re not alone. At SLG Family Law, we’ve guided countless individuals through this very concern, and we’re here to help you, too. Understanding how divorce impacts taxes, from filing statuses to alimony and property division, is key to setting yourself up for a stable financial future. With the right strategies, you can protect your interests, make clear-headed decisions, and confidently step into this new chapter. Let’s unpack what you need to know and how to take control of your financial path moving forward.

Filing Status and Tax Implications

Your filing status is one of the first tax-related changes you’ll face post-divorce. Filing status directly affects your income tax bracket, deductions, and credits, making this a decision with considerable impact.

Determining Your Filing Status

According to the IRS, if your divorce is finalized before December 31 of the tax year, you’ll file as either:

• Single or
• Head of Household (HOH) — if you meet these qualifications:
  • Lived apart from your spouse for at least six months.
  • Paid more than half the costs of maintaining your home.
  • Provided primary support for a qualifying dependent.

If your divorce isn’t finalized by the year’s end, you’ll need to file as either:

• Married Filing Jointly or
• Married Filing Separately — the latter may result in a higher tax bill but can offer protection if your spouse has questionable financial habits or liabilities.

Implications for Tax Credits and Deductions

Filing status also dictates which deductions or credits you can qualify for:

• Child Tax Credits: These can only be claimed by the parent who’s entitled to designate the child as a dependent, per the divorce decree.
• Earned Income Tax Credit (EITC): Single or HOH filers with dependent children often benefit from this credit, but eligibility might change based on shared custody agreements.

Alimony and Child Support

Support payments are often a sticking point during divorces, and understanding their tax implications is crucial for both parties.

Tax Treatment of Alimony

For divorces finalized after December 31, 2018, alimony or spousal maintenance is:

• NOT taxable income for the recipient.
• NOT tax-deductible for the payer.

Prior rules could still apply for agreements finalized before 2019, so it’s important to consult a tax professional to confirm.

Child Support Tax Rules

Child support payments are straightforward—they are:

• NOT taxable for the recipient.
• NOT deductible for the payer.

The divorce judgment will also often specify which parent can claim the child as a dependent.

Division of Assets

The division of marital assets is another key area where tax considerations can significantly impact outcomes. While most property transfers during divorce are tax-free, the long-term tax implications can vary based on the type of asset.

Real Estate

If one spouse keeps the marital home, note that:

• Selling it later may trigger capital gains tax, though some gains may be exempt if the home was a primary residence for at least two of the last five years.

Retirement Accounts

The transfer of retirement accounts like 401(k)s or IRAs during a divorce is tax-free if done under a Qualified Domestic Relations Order (QDRO). However:

• Withdrawing funds before 59½ may result in penalties and income taxes.

Investments

It’s vital to consider the cost basis when dividing investment accounts. Receiving an investment with high unrealized gains may lead to significant capital gains tax when sold.

Tax Planning Strategies for Divorce

Implementing strategic tax planning before, during, and after divorce can help reduce financial burdens. Here are some of our top tips:

1. Consult Professionals  

Work with both an experienced divorce attorney and a tax professional to ensure comprehensive planning that addresses your unique situation.

2. Understand Asset Taxability  

Know which assets include future tax liabilities. For instance, cash may seem less valuable than an IRA because it’s not taxable upon receipt.

3. Reassess Your Withholding

Post-divorce, update your W-4 form to adjust tax withholding from your paycheck.

4. Leverage HOH Filing

You’ll benefit from lower tax rates and higher standard deductions if you qualify as head of household.

5. Update Beneficiary Designations  

After finalizing the divorce, update beneficiary designations on accounts like retirement plans and life insurance.

Take Control of Your Finances

The financial implications of divorce don’t stop with the final decree. Taxes touch nearly every aspect of a settlement, from asset divisions to custody arrangements. Proactively addressing these issues during divorce negotiations can save you from costly surprises and set you up for long-term financial stability.

At SLG Family Law, our seasoned attorneys provide the legal and financial guidance you need to safeguard your future. If you’re navigating a divorce, contact us today to schedule a consultation. We’ll work with you to minimize financial stress and help you move forward with confidence.