Taxes When You Get Divorced

Divorce is one of the most tax-complicated life events there is, touching nearly every aspect of your return — filing status, dependency exemptions, property transfers, retirement accounts, and more. Planning ahead and understanding the rules can prevent costly mistakes.

Your filing status for the year is determined by your marital status on December 31. If your divorce is finalized by that date, you file as single (or as head of household if you qualify). Head of household status — available to unmarried parents who paid more than half the household costs and lived with a qualifying child for more than half the year — comes with a significantly lower tax rate and higher standard deduction than single filing, so it's worth pursuing if you're eligible. If your divorce isn't final by year-end, you're still married for tax purposes and must choose between married filing jointly or married filing separately.

For divorces finalized after December 31, 2018, alimony is no longer deductible by the payer and is not taxable to the recipient. For divorces finalized before that date (and not modified to opt into the new rules), the old rules apply: alimony is deductible for the payer and taxable income to the recipient. Child support is never deductible by the payer and never taxable to the recipient, regardless of when the divorce occurred.

The question of which parent claims the children as dependents matters because it determines who gets the Child Tax Credit, the dependent care credit, and the ability to claim the child's education credits. Generally, the parent with whom the child lives for more nights during the year (the custodial parent) is entitled to these tax benefits — but this can be waived in a divorce agreement, allowing the non-custodial parent to claim the child by filing Form 8332.

Dividing retirement accounts in divorce requires careful handling. Transferring an IRA to a former spouse directly in a divorce isn't a taxable event — the account is simply retitled, and neither party owes tax on the transfer itself. For 401(k) and pension accounts, you'll need a Qualified Domestic Relations Order (QDRO) — a court order instructing the plan to transfer a portion to the ex-spouse. Done correctly, a QDRO transfer is also tax-free. Transfers of regular taxable investments between spouses in divorce are also not taxable events, but the recipient takes the original cost basis, which has capital gains implications when they eventually sell. Dividing property — including the family home — is also generally not a taxable event at the time of the transfer, but the eventual sale of the home will have tax consequences based on the transferred basis.