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Divorce or Separation May Require Tax Planning Adjustments

A divorce or legal separation may affect a person’s taxes in multiple ways, starting with a change in tax filing status. Married taxpayers typically file using either married filing jointly (MFJ) or married filing separately (MFS) status, while most divorced taxpayers file under single or head of household (HoH) status. As a result, recently divorced or legally separated taxpayers may need to adjust their paycheck withholding or estimated tax payments. The IRS Withholding Estimator tool can help with this process.

A divorce agreement or separation decree may also carry a requirement for one former spouse to pay alimony and/or child support.

One of the potentially complicated questions that can arise in a divorce or legal separation is which taxpayer will claim the children as dependents. Generally, it is the custodial parent who may claim a child, but exceptions do exist. If parents share custody equally, they must either come to an agreement on who will claim the child each year, or apply the various “tiebreaker” rules established by the IRS.

Divorces and separations often also involve property transfers. If one spouse transfers property like a car, home or financial account to the other spouse as part of a divorce or separation, there is generally no capital gain or loss, and no federal tax on the transfer. However, it may be necessary to report certain transfers to the IRS as gifts, which in rare cases could trigger federal gift and estate tax.