Tax Issues Can Affect the Divorce Process
Divorce can affect filing status, retirement account divisions, support payments, tax liability, and certain child-related tax agreements. Each spouse should consult an accountant for tax advice and fully inform their divorce attorney about any tax problems.
01 Filing Status +
Each spouse, while married, can file their federal income tax returns either as “married filing jointly” or “married filing separately.” For the year of the divorce, the IRS determines filing status as of December 31. So, if a couple is divorced on December 15, they must file as single for that entire year because they were divorced as of December 31.
02 Property Transfers and Retirement Accounts +
Generally, transfers of property related to a divorce are not taxable. The division of retirement accounts into separate retirement accounts in a divorce is not a taxable event. If a husband has an IRA in his name and his wife is awarded 40% of the IRA, then her share is rolled over into a new IRA in the wife’s name and neither owes income taxes because of the division of that IRA account. If the ex-wife withdraws funds from her new IRA, she would then owe taxes. The same rules apply to 401(k) or 403(b) retirement plans.
03 Child Support and Spousal Support +
Payment of child support or spousal support has no effect on income taxes. Child support paid and spousal support are not deductible and support received is not considered income.
04 Tax Liability and Innocent Spouse Relief +
Income tax liability can sometimes be a family’s biggest debt and greatly affect a divorce. Each spouse in a divorce should consult an accountant for tax advice and completely inform his or her divorce attorney about any tax problems. Usually, spouses are both liable for any income taxes that are due and incurred during a marriage. However, in some situations, a husband or wife may qualify for “innocent spouse relief.”
See the current IRS Publication 971 on Innocent Spouse Relief.
05 Federal Tax Law and Divorce Orders +
A state divorce judge cannot change federal law on income taxes when rendering a final order. However, the parties can agree to matters that affect income taxes, such as the tax credit for children.
See the current IRS Publication 504 on Divorced or Separated Individuals.
06 Helpful IRS Publications +
These IRS publications provide federal guidance on the tax issues that most often come up in a divorce.
- Publication 971 — Innocent Spouse Relief: IRS guidance for spouses who may qualify for relief from certain tax liabilities.
- Publication 504 — Divorced or Separated Individuals: IRS guidance for tax issues involving divorced or separated individuals.