Divorce Tax Checklist - What the IRS Will Ask

Divorce has significant tax consequences that most people overlook until it is too late. This checklist covers the key tax issues before, during, and after your divorce.

36 items across 6 categories

Filing Status in the Year of Divorce

  • If divorced by Dec 31, you are Single or Head of Household for the full year
  • Head of Household requires: unmarried + paid more than half the home costs + qualifying dependent
  • Filing jointly vs. separately in the year of divorce - compare the tax liability
  • If still legally married on Dec 31, you may still file jointly (requires agreement)
  • Separate filing often results in higher total tax - calculate both before deciding
  • Coordinate with your spouse or attorney on filing status for the divorce year

Alimony Tax Treatment

  • Post-2018 agreements: alimony NOT deductible for payor, NOT income for recipient
  • Pre-2019 agreements: alimony IS deductible for payor, IS taxable income for recipient
  • Confirm which rules apply to your agreement based on execution date
  • Lump-sum property settlement is not alimony - different tax rules apply
  • Child support is never deductible and never taxable income
  • Document any payments clearly as alimony vs. property settlement vs. child support

Home Sale Capital Gains

  • If selling the marital home, each spouse can exclude up to $250,000 gain (if eligible)
  • Joint filers can exclude up to $500,000 - but only if both meet the 2-year ownership and use test
  • After divorce, each spouse gets a $250,000 exclusion individually
  • If one spouse keeps the house, timing the sale after divorce may affect which exclusion applies
  • Calculate your gain: sale price minus purchase price minus improvements minus selling costs
  • If gain exceeds exclusion, the excess is taxable - plan accordingly

Retirement Account Tax Considerations

  • QDRO transfers are tax-free if rolled into an IRA - do NOT accept a check
  • Taking cash from a QDRO transfer (not rolling over) triggers income tax plus potential penalties
  • Traditional 401(k) and IRA: taxable at withdrawal - discount the present value by your tax rate
  • Roth IRA: tax-free at withdrawal - may be worth more than an equal traditional balance
  • Do not withdraw funds directly from retirement accounts - roll over to avoid 10% penalty
  • Work with a tax professional before choosing between offset and direct split

Child-Related Tax Items

  • Dependency exemption: only one parent can claim each child per year
  • Child Tax Credit ($2,000/child) goes to the parent who claims the exemption
  • Earned Income Tax Credit: only the custodial parent can claim this
  • Childcare expenses tax credit: goes to the parent who pays and claims the child
  • 529 plan account control: designate the account owner carefully post-divorce
  • Update W-4 withholding after divorce to reflect new filing status and allowances

Business and Investment Tax Issues

  • Transferring business interests in divorce is generally tax-free between spouses
  • Receiving business assets with low tax basis means higher capital gains when you sell later
  • Stock options and restricted stock units: understand vesting schedule and tax timing
  • Cryptocurrency transfers in divorce are tax-free, but selling later triggers capital gains based on original cost basis
  • Investment accounts: check the cost basis of transferred brokerage accounts
  • Consult a CPA before finalizing any asset transfers - tax basis matters enormously

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SettleLens provides financial scenario modeling for informational purposes only. Not legal advice. Always consult a qualified family law attorney before making settlement decisions.