How Do Taxes Work During and After Divorce?

Divorce changes almost everything about your finances, and taxes are often the piece people think about last and regret most. Understanding a few core rules early can help you avoid surprises when the first post-divorce tax season arrives. For a focused explanation, read Who Counts as the Custodial Parent in Washington, and Does It Control Who Claims the Child on Taxes.

For related help, see divorce help, prenuptial-agreement guide, and property-division guide.

Your Filing Status Changes Based on Where You Stand at Year End

One of the first things to understand is that the IRS generally looks at your marital status on the last day of the year. If you are still legally married on December 31, you are usually treated as married for that entire tax year, which means you will typically file either jointly or as married filing separately. If your divorce is final by December 31, you are generally treated as single or, if you qualify, as head of household for the whole year.

This timing detail matters more than most people expect. A divorce that finalizes in late December versus early January can change your filing status, your tax brackets, and the credits you qualify for. Because filing jointly and filing separately can produce very different results, and because head of household status carries its own requirements, this is an area where the calendar can quietly cost or save you real money.

Who Claims the Children

When parents split, only one of them can claim a given child as a dependent in a given year, which affects the child tax credit and certain other benefits. As a general rule, the parent the child lives with for the greater part of the year is treated as the custodial parent and is entitled to claim the child. Parents can agree to shift that benefit to the other parent, but the IRS requires specific paperwork to do so, and a divorce decree alone may not be enough for the IRS without the correct release form.

Many parenting arrangements in Snohomish County involve close-to-equal time, which makes the dependency question worth addressing directly rather than assuming it will sort itself out. Deciding in advance who claims which child, and in which years, and putting it in writing avoids the unpleasant scenario of both parents claiming the same child and drawing IRS attention. Because the rules turn on specific facts and forms, this is a good subject to confirm with a tax professional before you file.

Dividing Property Is Usually Not a Taxable Event

Here is a piece of good news that surprises many people. When property moves between spouses, or between former spouses as part of a divorce, that transfer is generally not treated as a sale and generally does not trigger income tax at the moment of transfer. Federal law provides that no gain or loss is recognized on a transfer of property to a spouse, or to a former spouse when the transfer is incident to the divorce, and the person receiving the property takes it with the same tax basis the other spouse had (26 U.S.C. 1041).

That last part is the catch worth understanding. Because the receiving spouse inherits the original basis, the built-in tax on an asset travels with it. A house or an investment account handed over in the divorce may look equal to a pile of cash of the same headline value, but if that asset carries a large unrealized gain, the spouse who keeps it may owe tax later when they sell. Two assets with the same sticker price are not always equal once you account for the tax that comes due down the road. This is exactly why comparing after-tax value, not just face value, is so important when dividing property.

Spousal Maintenance and the 2019 Change

If you have heard that alimony is tax deductible, you may be working from outdated information. For many years, the spouse paying spousal maintenance could deduct it, and the spouse receiving it had to report it as income. That flipped for newer divorces. Under the 2017 federal tax law, the deduction for alimony and separate maintenance payments was repealed for divorce or separation instruments executed after December 31, 2018 (the repeal of 26 U.S.C. 215 by Public Law 115-97). For those newer orders, the paying spouse cannot deduct maintenance, and the receiving spouse does not report it as taxable income.

The date of the instrument controls, so agreements finalized in 2018 or earlier may still follow the old rules, while agreements modified after 2018 can be pulled into the new rules if the modification says so. Because whether maintenance is taxable changes how much each spouse actually keeps, this shift affects how a fair maintenance number should be calculated in the first place. It is one more reason to run the numbers carefully rather than borrowing a figure from a friend whose divorce predates the change.

Other Practical Points Worth Watching

Beyond these headline issues, a few practical items catch people off guard. Retirement accounts often need a specific court order to divide without triggering taxes and penalties, so those transfers should be handled with care. Refunds and tax debts from years you filed jointly can become a point of dispute, and joint returns can carry joint responsibility for what was owed. Estimated tax payments may need to change once your withholding no longer reflects a two-income household. None of these are reasons to panic, but all of them are reasons to plan.

Get Advice That Fits Your Situation

Taxes in divorce are highly specific to your income, your assets, and your family, and the rules described here are general. Nothing in this article is tax advice for your circumstances, and you should consult a qualified tax professional or accountant before making decisions. On the legal side, the Law Office of Chad Foster helps Snohomish County families structure divorce settlements with these financial realities in mind, so the agreement you sign reflects what you will actually keep. Reach out if you would like to talk through how these issues might apply to your case.

This article is general information and is not legal or tax advice for your specific situation. Please consult a qualified attorney and a tax professional about your circumstances.