Major Tax Impacts of Divorce

This is a good time for the annual refresher of the typical tax issues and impacts of divorce.

Filing status – If the divorce is finalized by December 31st of the year, then the filer’s status is considered single for that entire year.

Alimony – Typically includible in the income of the receiving spouse (yes, really) and deductible to the paying spouse.

Child Support – Not includible and not deductible. Note: The government can divert tax refunds and apply them to child support arrears (yes, really).

Dependency Exemption – By default, the parent who has the child most often receives the dependency exemption. The spouses or the court can deviate from the default. The parents and child collectively get the most bang from the exemption by assigning it to the higher earning spouse.

Marital Home – Transfer of one spouse’s interest to the other spouse in a divorce is not a taxable event

Legal Fees – Not deductible (except for enforcement of alimony obligations).

Retirement benefits – With a special type of court order called a QDRO, the other spouse can receive a share of the working spouse’s retirement benefits without triggering any taxable event or tax penalty.

Read more in this New York Law Journal article: Tax Considerations and Issues Relating to Divorce .