When Marital Status Changes, So Does Your Tax Picture

Here’s what to know if you’re going through a separation or divorce

If you’ve recently separated or finalized a divorce, you’ve got a few tax-related updates to consider before the end of the year. Your marital status as of December 31 determines your filing status for the entire tax year, so if your divorce isn’t final yet, the IRS still considers you married for that year.

Here’s what else you should keep in mind:

Update your withholding

Once your marital status changes, it’s time to review your tax withholding. Submitting a new Form W-4 to your employer can help prevent surprises come tax season. If you’re receiving alimony, you may need to make estimated tax payments instead. The IRS Tax Withholding Estimator is a helpful tool for double-checking your numbers.

Alimony isn’t always taxable or deductible

Not every payment between former spouses counts as alimony. For federal tax purposes, alimony typically refers to payments made under a divorce decree, legal separation, or written agreement. If the payment qualifies as alimony:

• The person paying may be able to deduct it.
• The person receiving generally needs to report it as income.

But child support, noncash property settlements, or payments made voluntarily (without a court order) don’t count as alimony and they aren’t deductible or taxable.

Know the rules for claiming dependents

In most cases, the custodial parent is the one who claims the child as a dependent. If custody is shared equally and you’re not filing a joint return, you’ll need to agree on who gets the exemption. When no agreement is reached, IRS Publication 504 explains how the tie-breaker rules work.

Also worth noting: when both alimony and child support are part of the divorce terms and the full amount isn’t paid, payments are applied to child support first. Only what’s left may count as alimony.

Property transfers don’t trigger tax, but may need to be reported

Transferring property to a spouse or former spouse as part of a divorce generally doesn’t result in a gain or loss for tax purposes. Still, depending on the situation, you might need to file a gift tax return.

Need help sorting this out?

These changes can be tough to navigate on your own. If your marital status has changed or you’re in the process of separating, it’s worth having a conversation with your tax advisor now to avoid confusion at filing time.