Taxes may not be your top priority when you are facing divorce, but there are many decisions made in a divorce that can impact your tax situation for a long time. These decisions can be costly and if you are not aware of the tax implications of these choices, then any additional tax cost will not be accounted for in the divorce settlement.
It’s important that you consult a tax professional who can work with you to help ensure that there are no unknown or unintended tax consequences in the divorce settlement. Working with a tax attorney or tax accountant who understands the tax laws may help ensure that you will not incur any current or deferred tax liabilities that you are unaware of when executing the divorce agreement. A tax advisor can review the divorce or separation agreement before it is finalized to determine the tax consequences of the agreement. While this advisor will typically consider any potential tax issues from a technical standpoint, there are some basic things that may be helpful for you to know.
Spousal support payments are commonly used in divorce settlements to shift cash from one spouse to another to provide income
It’s important to understand how these payments will impact your taxable income and cash flow. Alimony is one type of spousal support payment. The 2017 Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony paid and received. Any divorce or separation agreement instituted on or after January 1, 2019, is governed by this tax law, and alimony income is not taxable to the recipient and there is no tax deduction for alimony paid. This change in federal tax treatment of alimony was made permanent and was not impacted by the passage of the One Big Beautiful Bill Act passed in July 2025. The tax treatment of alimony for agreements completed by December 31, 2018, however, was not changed by this legislation and payments that qualify as alimony are taxable income to the payee and tax deductible to the payer.
Not all payments made from one spouse to another are considered alimony
In order for spousal support to qualify as alimony, the payments need to be made pursuant to a divorce decree or separation agreement. Payments must be made in cash, not property. The spouses may not live in the same household, they may not file a joint tax return, and there can be no requirement that payments be made to the payee after death.
Determining your projected post-divorce cash flow can be essential in divorce planning
An analysis of projected cash flow enables you to determine if a proposed divorce settlement may allow you to maintain your current lifestyle by considering your anticipated income and spending needs. You will need to provide your current sources of income, anticipated expenses, and assets and liabilities in order to determine an equitable divorce settlement. This information can also be used to simulate potential asset division scenarios that can be analyzed to project estimates of your annual cash flow and the length of time that the assets may last based on your spending needs. Providing this type of cash flow analysis to your tax advisor can help instill confidence in a secure financial future after the divorce is finalized.
The division of the marital assets is used to equitably allocate the assets and liabilities of the divorcing couple
A tax advisor can determine any tax ramifications of assets or liabilities you will receive in the divorce. Each asset can be taxed differently, even when the asset seems to be comparable. One example is the division of retirement assets such as a 401(k) or Individual Retirement Account (IRA). There is a big tax difference between receiving traditional or Roth IRA or retirement plan assets. Traditional IRA and retirement plan assets are taxable when the assets are distributed to the beneficiary while Roth IRA assets are distributed to the beneficiary tax free. Real estate received as part of a divorce settlement may be taxable when the asset is sold, so it is important to know the cost basis of any real estate received along with any tax deductions that have been claimed on that real estate, such as depreciation. The cost basis and depreciation will impact your taxable income when this asset is sold. The potential tax on the sale or distribution of assets received in a divorce should be considered when these assets are divided.
Once you are divorced or separated, there will likely be a change to your tax filing status
A taxpayer’s tax filing status is used to determine a number of factors on the tax return, including, but not limited to, the tax rate. A taxpayer’s marital status on the last day of the tax year determines the filing status for that entire tax year. An individual will be considered to be divorced for the entire year if the divorce was finalized on or before December 31 of the tax year. A divorced individual is able to use the Single or Head of Household filing status for the tax year in which the divorce was finalized.
Going through a divorce can be a long process, and in many cases a couple in the middle of a divorce is still married at the end of the tax year
Taxpayers not legally divorced or separated on December 31 are considered married for that tax year and will have the option to file their tax returns as Married Filing Jointly, Married Filing Separately, or Head of Household. The Married Filing Jointly filing status will usually result in a lower overall tax bill, but many individuals don’t want to have to work with their spouse to get the return filed, as there may be disagreement regarding factors that impact the return. If you are in this situation, then your next best option may be the Head of Household filing status.
The Head of Household filing status is typically more advantageous than the Single or Married Filing Separately filing statuses if the taxpayer has a dependent child
A taxpayer is able to file as Head of Household if the taxpayer is not married or is legally separated at the end of the tax year or the taxpayer did not live with his or her spouse for the last six months of the tax year. The taxpayer also has to have paid for more than one half of the costs to maintain the household and the taxpayer’s child(ren) must qualify as dependent(s) and live with the taxpayer for more than one half of the year. All these rules probably seem overwhelming, but it’s important for you to know that there are options when trying to determine the correct filing status. A tax advisor can work with you to determine the most advantageous filing status for your circumstances.
There are also taxable income division considerations that are helpful for you to know
If you have been filing a return jointly with your spouse since you were married, then you reported all income on the same tax return without having to determine what income belonged to each spouse. When divorcing, you will need to figure out your income separately so that each spouse reports the proper amount of income. Determining the proper allocation of income and deductions in the tax year a divorce is finalized or when a divorcing couple chooses to file separately is dependent on the distribution laws of the state where the divorce decree was issued. Taxpayers in most community property states are required to equally split all community income up to the date of the divorce decree. After the divorce has been finalized, all income from that date through the end of the tax year is reported by the individual who earned it. Taxpayers divorcing in an equitable distribution state will report all income they earned individually and any income received from property they personally own.
Not only is divorce difficult, but it can be very expensive
It’s commonly asked whether or not any of the attorney or advisor fees incurred during a divorce are tax deductible. Fees paid for tax planning and legal advice are not tax deductible for federal purposes. Unfortunately, the TCJA repealed the deduction for legal and other professional fees for individual taxpayers beginning January 1, 2019. While this provision of the law did sunset on December 31, 2025, the One Big Beautiful Bill Act made this provision permanent. There are some states that still allow a tax deduction for legal and professional fees so you should discuss the tax deductibility of these fees with a tax advisor to fully understand the rules for your state.
There is another piece of information that is easy to overlook but has a big impact on the actual amount of tax paid. An overpayment on your prior year tax return that has been applied to next year’s estimated tax and estimated tax payments that have been paid during the tax year can be allocated between spouses.
The IRS allows taxpayers to allocate these payments in any agreed-upon manner as long as an explanation for the allocation is attached to the tax return when it is filed. The distribution laws in your state may dictate the allocation of these payments. The payments will likely have to be allocated equally to each spouse if the divorce is in a community property state and the tax payments were made with community funds. The laws for equitable distribution states may require that any estimated tax payments be divided among spouses in proportion to each spouse’s separate tax liability.
Tax laws are complicated. However, being equipped with information regarding the tax implications of divorce may help you navigate these complex tax issues and help you work toward a reasonable divorce settlement agreement.
Please visit our visit our Matrimonial and Divorce Advisory Solutions resource page for more timely divorce planning content.
Data source: www.irs.gov.
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