A divorce involves more than dividing property and determining custody; it also creates significant federal tax obligations before the IRS. If not properly managed, these obligations can lead to unexpected liabilities, penalties, and disputes. This article provides a clear and technically accurate overview of the key U.S. tax rules that apply during and after a divorce, based exclusively on the Internal Revenue Code (IRC) and IRS guidance.
Marital Status and Filing Status Determination
For federal tax purposes, the IRS determines marital status as of the close of the tax year, which for individuals is December 31.
What does this mean?
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- If the divorce is final before December 31, the taxpayer cannot file as married. Filing options include Single or Head of Household (if meeting the criteria under IRC § 2(b)).
- If the divorce is not final, the IRS considers the couple married, allowing filing as Married Filing Jointly (MFJ) or Married Filing Separately (MFS).
Joint Filing and Joint and Several Liability
When spouses file jointly under MFJ, their incomes are combined, and they share joint and several liability for the entire tax obligation. This means the IRS may collect the full amount owed from either spouse, regardless of who earned the income or caused the error.
Relief Provisions for Spouses Affected by Errors or Omissions
Taxpayers who unknowingly signed a joint return containing inaccuracies may request relief through three statutory mechanisms:
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- Innocent Spouse Relief
- Separation of Liability Relief
- Equitable Relief
These provisions can partially or fully eliminate liability attributed to the other spouse.
Dependent Children and Tax Credits
Claiming a child as a dependent influences major credits such as:
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- Child Tax Credit
- Earned Income Tax Credit
- Head of Household Status
For divorced or separated parents:
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- The “custodial parent” (the parent with whom the child lived the greater number of nights) is defined under IRC § 152(e).
- The custodial parent may release the claim to the noncustodial parent using Form 8332.
Proper coordination is essential to avoid conflicting claims.
Alimony Under the Tax Cuts and Jobs Act (TCJA)
The TCJA made significant changes to the treatment of alimony.
For agreements executed after December 31, 2018:
- Payments are not deductible by the payer.
- Payments are not taxable to the recipient.
These changes stem from the repeal of IRC § 215 and modifications to IRC § 61. Older agreements maintain the previous rules unless amended to adopt the TCJA framework.
Transfers of Property “Incident to Divorce”
Transfers of property between spouses or former spouses generally do not trigger recognition of gain or loss if the transfer is “incident to divorce.”
This protection applies broadly to residences, investments, and personal property, although later dispositions of those assets may produce taxable consequences.
Updating Personal Information With the IRS
Following a divorce, taxpayers should update:
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- Form W-4 with their employer
- Address via Form 8822
- Legal name with the Social Security Administration (SSA), if applicable
- Bank information for direct deposit
Failure to update information may cause delayed refunds or incorrect IRS notices.
Why These Rules Matter
Understanding the tax implications of divorce is essential for avoiding unnecessary complications. Incorrect filing status, overlooked liabilities, or improperly claimed dependents can result in audits, penalties, and extended financial disputes between former spouses. By aligning actions with the Internal Revenue Code and IRS procedures, taxpayers can:
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- Prevent joint liability for taxes attributable to the ex-spouse
- Maximize available tax credits for dependents
- Correctly handle alimony and property transfers
- Ensure compliance and avoid penalties
- Protect their financial stability during and after divorce
Still have questions? Need guidance on a complex situation? JH Tax Law can help! Contact our office for a confidential consultation today.
