Part 2 of the “Untangling Finances in Divorce” Series

When many people think about divorce, they focus on child custody, spousal support, and who will keep the house. But just beneath the surface lies one of the most overlooked—and often misunderstood—aspects in divorce: taxes. How you address tax consequences during your divorce can significantly affect the outcome of your financial settlement, your future income, and your peace of mind.

In Part 2 of our “Untangling Finances in Divorce” series, we focus on how tax calculations intersect with property division and support determinations. This blog follows Part 1: How Business Valuations Impact Divorce and leads into Part 3 which will focus on Child and Spousal Support, completing a holistic look at how financial considerations shape divorce outcomes.

Filing Status: Why Timing Matters

Your marital status as of December 31 of any tax year determines how you can file your taxes for that year. If you’re still legally married on that date, the IRS considers you married—even if you’re separated.

You’ll typically have three options:

• Married filing jointly (may result in lower tax liability)
• Married filing separately (may protect you from liability for your spouse’s representations)
• Head of household (available only to certain custodial parents who meet specific criteria)

Deciding how to file can be complicated, especially when divorce is pending. Missteps can lead to underpayment penalties or surprise tax bills. A family law attorney who understands tax implications can help you determine whether to finalize your divorce before year-end or delay it based on your specific financial situation. However, it is best to consult a CPA as well.

Spousal Support After the Tax Cuts and Jobs Act (TCJA)

Before 2019, spousal support (commonly referred to as alimony) was deductible by the payor and taxable to the recipient. That changed with the Tax Cuts and Jobs Act. For separation agreements executed after January 1, 2019, spousal support is no longer tax-deductible for the payor and is no longer treated as taxable income to the recipient.

This change has ripple effects:

• Payors lose a significant tax benefit and may negotiate for lower payments.
• Recipients benefit from tax-free income but may receive less overall.
• Structuring lump sum or periodic payments requires greater care to ensure fairness.

If your divorce was finalized before 2019, the old tax rules still apply unless you modify your agreement and expressly adopt the new law. Be sure to consult both a family law attorney and a tax advisor before making any changes.

Child Support and Tax Benefits

Unlike spousal support, child support is always tax-neutral:

• The payor cannot deduct child support payments.
• The recipient does not report child support as income.

However, tax implications still arise when determining who may claim the children as dependents for tax purposes. The Child Tax Credit, Earned Income Credit, and any dependent care credits can significantly impact a parent’s tax return.

Without clear guidance in your separation agreement or divorce order, both parents may attempt to claim the same child—triggering IRS audits or delayed refunds. To avoid disputes:

• Specify in your agreement which parent can claim each child in which tax years.
• Clearly identify what benefits each parent may take such as they are not all the same but often must be claimed as a package.
• Consider alternating years or assigning credits based on income levels.

Tax Impacts of Dividing Marital Assets

Property transfers between spouses incident to divorce are generally non-taxable, but that doesn’t mean taxes won’t arise later.

Capital Gains Tax on Real Estate

If one spouse receives the marital home and later sells it, that spouse may be responsible for capital gains tax on any appreciation, depending on how title is held.

Retirement Accounts

Dividing retirement assets (e.g., 401(k)s, IRAs) often require a Qualified Domestic Relations Order (QDRO) or similar order. These orders allow for a tax-free transfer of retirement funds between spouses. Without a QDRO, the receiving spouse may face early withdrawal penalties and income taxes on the transferred funds.

Pre-tax vs. After-tax Assets

Not all marital assets are created equal. A $100,000 checking account and a $100,000 traditional IRA have vastly different tax consequences. It’s essential to compare after-tax values to ensure a fair division.

Why Tax Planning During Divorce Matters

Divorce is already expensive. Failing to account for tax impacts can make it far worse.

Working with a divorce attorney who collaborates with CPAs or tax advisors can help you:

• Project post-divorce income and tax brackets
• Structure support payments for maximum efficiency
• Divide property in ways that minimize future tax exposure
• Adjust tax withholding appropriately after your marital status changes

Conclusion: Don’t Let Taxes Derail Your Divorce

Divorce is not just about dividing assets—it’s about protecting your long-term financial health. From asset transfers to dependent credits, every decision has a tax consequence that must be addressed up front as all these issues require informed planning.

This post is Part 2 of our three-part series, “Untangling Finances in Divorce.”

• Part 1: How Business Valuations Impact Divorce discusses how to value and divide business interests in divorce.
• Part 3: Child and Spousal Support will explore how courts calculate child and spousal support and what income is considered.

If you are facing divorce in Virginia and want to ensure your settlement is both fair and financially sound, please contact Jennifer McCammon at (703) 525-4000 or jmccammon@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Any views or opinions expressed herein are those of the authors and are not necessarily the views of the firm or any client of the firm.