- Days left

Don't Let Divorce Destroy You at Tax Time

×

divorce taxes
Divorce is one of the hardest things you may ever go through -- both emotionally and financially. But while you're focused on your now-adversarial relationship with your ex, you shouldn't forget to keep an eye on another entity that may be after a larger chunk of your assets thanks to your split: The IRS. Turns out, divorce has a huge impact on your taxes, and knowing what's at stake can help you avoid major complications later on.

Here are some of the things to keep in mind as you go through the divorce process.

Filing Status

Checking the box for either married or single may seem like the simplest thing in the world, but it gets complicated with divorce. The IRS wants to know your legal marital status as of the end of the year you're filing for. So even if you've filed your paperwork, if your divorce isn't final by Dec. 31, then you'll be considered married for the year.

However, there's an exception that allows separated parents to claim the favorable head of household status, which gives you greater deductions. To qualify, you must have paid more than half your housing costs for the year, lived apart from your spouse during the last six months of the tax year, and your dependent child must have lived in your home for more than half the year.

Exemptions for Children

The question of who gets to claim exemptions for children can make a huge difference to your tax bill. Typically, the test depends on which parent the child lives with for more than half the year. But divorced or separated couples can essentially pick who gets the exemption for children by signing a written declaration. With the current write-off at $3,700 per child, the decision you make can determine which of you will get up to $1,300 in tax savings.

Alimony, Maintenance, and Child Support

Payments between former spouses under a divorce decree fall into different categories. Cash payments that qualify as alimony are deductible by the person who makes them and are counted as income for the person who receives them. But you can generally agree to reverse that treatment and avoid any tax consequences for payments if you prefer.

Child support, on the other hand, isn't deductible by the payer or counted as income by the recipient or the child. So as you describe certain payments in your divorce agreement, be careful because the description can change the way those payments get taxed.

Retirement Accounts

As part of a property settlement, a spouse may be entitled to part of the other spouse's IRAs or employer-sponsored retirement account. For 401(k)s and other employer plans, a qualified domestic relations order can allow you to get benefits from a spouse's plan and treat them as if they're your own, thereby avoiding potentially disastrous tax consequences. Under certain circumstances, you may be able to roll 401(k) money into an IRA of your own.

Property Transfers

In general, neither spouse will realize any capital gain or loss or other tax consequences from receiving or giving up property in a divorce decree. But if you later sell property that you received due to divorce, you'll then have to pay taxes on gains, based on the original tax basis of the property you received.

To be treated as part of the divorce, a property transfer must be complete within a year of the date the marriage legally ended, unless it was specifically provided for under the divorce agreement. In that case, you have up to six years to make transfers, although later ones may still be valid if you can show valid reasons for the delay.

Community Property

Finally, most states treat each spouse's income as his or her own, even when it's jointly reported on a tax return. But in community property states, which include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, different rules may apply. As a result, you may be treated as having earned part of your former spouse's income during the year in which you divorce.

The problem here is that you may have no idea how much money your former spouse made. Accordingly, the IRS won't penalize you for mistakenly leaving out community property income as long as you can show that you had no reason to know about the income and that it wouldn't be fair to force you to include it as your own income.

Learn More

As you'd expect, there are all sorts of nuances beyond these general rules. Fortunately, the IRS makes it easy to get more information about the tax impact of divorce and separation. Just click here and see everything the IRS has to say on the subject.


Motley Fool contributor Dan Caplinger hopes you'll never need to use this advice. You can follow him on Twitter here.


Increase your money and finance knowledge from home

Goal Setting

Want to succeed? Then you need goals!

View Course »

How much house can I afford

Home buying 101, evaluating one of your most important financial decisions.

View Course »

TurboTax Articles

11 Fun Ways to Spend Your Tax Refund

There are plenty of practical ways to spend your tax refund ? such as saving for major expenses, banking it as the start of an emergency fund or paying down debt. But it?s hard to resist the allure of spending some or all of your refund on something a little more fun. If that?s the road you want to go down, here are some ways suggestions.

A Tax Filing Factsheet for eBay Sellers

You can find almost anything for sale on eBay, from a piece of fine art to clippings of Justin Bieber?s hair. So it's no surprise that the IRS doesn't view all sellers alike in the online marketplace. You may not have to pay tax at all if you are essentially hosting an online garage sale, but if you run your eBay account more like a business, you should be reporting your sales to the IRS.

Tax Tips for Handymen and Odd Jobs

If you work as a handyman or do odd jobs around town for money, you are operating a business in the eyes of the IRS. Since you own your own business, you're likely a self-employed sole proprietor. This means you'll have lots of potential tax deductions to investigate.

Identity Theft: 7 Steps to Reclaiming Your Identity and Keeping it Safe

As more personal information continues to be stored online, the risk of identity theft also increases. In 2014 alone, the Bureau of Justice reported that 17.6 million U.S. residents experienced identity theft. If someone uses your personal data pretending to be you, it's a serious crime. With quick, decisive action, you can help discover the fraud, stop further damage and reclaim your identity. Here are six steps to get you on your way.