How Will a Divorce Affect My Taxes?

 Posted on February 07, 2025 in Divorce

Divorce can impact your tax situation in ways that might surprise you. From changing your filing status to determining who claims the children as dependents, divorce can complicate tax season if you are not prepared. To avoid costly mistakes, it is very important to understand the tax implications of your divorce. A knowledgeable Illinois divorce lawyer can help you navigate these changes and explain what they may mean for your personal circumstances.

What Is My Filing Status After a Divorce?

Your tax filing status will depend on your marital status as of December 31 of the tax year. If your divorce is finalized on or before December 31, you must file as either "single" or "head of household". If you are legally married on December 31, you may file as "married filing jointly" or "married filing separately."

The "head of household" status offers substantial tax benefits, including a higher standard deduction and lower tax brackets. To quality, you must meet these criteria:

• You are considered unmarried as of December 31 

• You paid more than half the cost of maintaining your home for the year

• A qualifying child or dependent lived with you for over half the year

Who Gets to Claim the Children as Dependents?

Generally, the custodial parent, which is the parent the children live with for the majority of the year, has the right to claim the children as dependents. However, this rule can be altered through a divorce agreement. For example, the noncustodial parent can claim the children if the custodial parent signs IRS Form 8332, releasing their claim to the exemptions. It is vital to address this issue during your divorce negotiations to avoid future disputes.

How Are Alimony Payments Taxed?

The Tax Cuts and Jobs Act (TCJA) states that spousal maintenance is no longer tax-deductible for the paying spouse and is not considered taxable income for the receiving spouse. This rule applies to divorces finalized on or after January 1, 2019.

For divorces finalized prior to this date, the old tax rules still apply. Spousal maintenance payments can be deducted for the payer and taxed for the recipient. If your divorce agreement was finalized before 2019 and you want to modify it, your taxes might be impacted, depending on the circumstances. 

How Does Property Division Affect Taxes?

In Illinois, marital property is divided equitably, but this process can have tax implications. Some of the implications include:

• Capital Gains Tax: Transferring assets like real estate or investments to one spouse may trigger these taxes when those assets are sold.

• Retirement Accounts: Separating retirement accounts requires careful planning to avoid tax penalties. A qualified domestic relations order (QDRO) is often needed to divide these accounts without causing early withdrawal fees or taxes.

Can Divorce Impact My Tax Refund or Liability?

Divorce can directly affect your tax refund or liability. For instance, if you file separately instead of jointly, it could result in a higher tax liability because you can lose access to certain tax breaks available to joint filers. If your former spouse owes back taxes, the IRS may take a portion of a joint refund. To protect yourself, you may want to consider filing IRS Form 8379, which allows you to request your portion of the refund. 

Contact a Kane County, IL Divorce Lawyer

It can be challenging to understand the tax implications of divorce, but you do not have to navigate this alone. A St. Charles, IL divorce attorney at Goostree Law Group can help you address these tax issues and protect your finances. Call 630-584-4800 today to schedule a free consultation.