Divorce has significant effects on your taxes. For example, if your divorce is final by December 31 of a tax year, the IRS will consider you unmarried for that entire year, so you must file individual rather than joint tax returns. Moreover, due to new tax legislation, alimony is no longer deductible for the person paying and it not taxable to the recipient. It’s possible to go back and change a prior decree to make alimony no longer tax deductible, but changing a divorce decree is easier if you used the collaborative process to handle your divorce in the first place. There are several tax issues to consider when getting a divorce, including how to handle the sale of your home, sharing retirement accounts, deciding who will claim children as dependents, selecting the proper filing status for the year of your divorce, and handling alimony.
Selling the Family Home
Getting a divorce often requires selling the family home because neither spouse can afford to keep it. You may have to pay capital gains tax on any profit unless you used the house as your main residence for two of the prior five years and have not excluded capital gains from the sale of another home within the prior two years. If you meet these criteria, each spouse can exclude $250,000 in capital gains on their home from any tax. Getting an agreement about how to handle the sale of a family home is much easier if you used the collaborative divorce process rather than adversarial litigation.
Dividing Retirement Accounts
During a divorce, a married couple may need to divide a 401(k) or another qualified pension plan. If only one spouse worked, the other spouse may be entitled to share the working spouse’s pension earned during the years they were married. However, companies won’t pay pensions until the worker has retired, so the spouses must wait to collect that asset. To divide a pension, the court will issue a Qualified Domestic Relations Order (QDRO) providing instructions to the plan administrator about what part of the pension should be paid to the alternate payee—the divorced spouse who didn’t work. A QDRO must be specific about who will receive payments, the schedule of those payments, and the percentage or amount of the pension benefit to be paid the alternate payee (ex-spouse). Again, it’s usually easier to divide a pension if you opt for a collaborative divorce rather than litigation.
Claiming Dependent Children
Divorced parents can’t both claim their children as dependents so they must agree who will claim the children on a tax return. Typically, the custodial parent will be entitled to the deduction, but other arrangements are possible, including alternating the children as dependents or dividing the children between the parents. Even though the dependency deduction was suspended by the Tax Cuts and Jobs Act until January 1, 2026, it’s still important to decide who may claim the children as dependent because child tax credits, child care tax credits, an earned income tax credit, and a tax credit for qualified educational expenses may be available to the person who can claim the children as dependents. However, only the custodial parent can claim head of household status unless the parents are sharing custody—then the parent with the higher income can claim head of household status. Needless to say, getting this issue resolved is much easier in a collaborative rather than a litigated divorce.
Filing Status After Divorce
During the year your divorce is final and after that, you can no longer file as “married, filing jointly” or “married, filing separately” on your tax return. Instead, you must file as “single” or “head of household.” You file as head of household if you are the custodial parent (or the higher earning parent if you share custody of the children), you paid at least half the cost of a home during the year, and a qualified dependent lived with you during the year. Both spouses can’t use head of household status on their tax returns. If the parents don’t share custody, the noncustodial parent can’t claim head of household status even if he or she claims the children as dependents on a tax return. Again, these negotiations are easier if you choose a collaborative divorce rather than litigation.
Alimony used to be tax deductible for the person paying and taxable to the person receiving the payments. However, in 2019 and thereafter, alimony is no longer deductible or taxable. The IRS does allow you to go back and change a previous divorce decree filed before 2019 by agreement so the spouse paying the alimony won’t deduct the payments and the receiving person won’t have to claim the payments on his or her tax return. Getting agreement to change a divorce decree is easier if you opted for a collaborative divorce.
Considering how many complex issues need to be resolved concerning taxes in a divorce proceeding, it makes sense to opt for a collaborative divorce where the parties have the benefit of a neutral financial professional on the collaborative team to help them negotiate a settlement that meets the needs of both spouses and is tax compliant rather than choosing a litigated divorce and letting a judge decide these tax issues for the family.