Tax Considerations in Divorce: What Every Woman Needs to Know Before Signing the Final Agreement
Divorce touches nearly every part of life—your emotions, your finances, and the daily routines you once took for granted. You may be balancing not only the end of a marriage, but also the needs of children, the demands of a career (or a new path ahead), care for aging parents, and the uncertainty of what your next chapter will look like. It’s a lot—and it’s completely normal to feel overwhelmed.
As a tax attorney, Certified Financial Planner®, and Certified Divorce Financial Analyst®, I have worked with women across the financial spectrum who were blindsided by tax consequences they didn’t anticipate—and in some cases, weren’t advised about. Attorneys understandably often focus on property division, custody, and support—but taxes can turn a fair-looking settlement into something very different once April 15 rolls around.
Following is a detailed summary of some of the most important tax considerations that should be evaluated during and after divorce proceedings. I’m not going to sugar-coat it: unless you’re a bit of a tax nerd like me it’s pretty dry reading! The good news? You don’t need to memorize the rules or become a tax expert. What matters most is knowing the right questions to ask and surrounding yourself with the right team of advisors who can guide you through the complexities.
Marital Status and Filing: One Date, Big Consequences
When determining your marital status, the IRS bases this classification solely on whether you are legally married as of December 31 of the tax year, leading to one of two filing statuses:
Still legally married on December 31: You may file as Married Filing Jointly or Married Filing Separately.
Legally divorced on December 31: You will file as Single or possibly Head of Household, if you meet certain criteria.
If you're still legally married on December 31, filing jointly may result in a lower overall tax bill due to more favorable tax brackets, enhanced eligibility for certain deductions and credits and the ability of both spouses to benefit from any loss carryovers and other tax attributes. In fact, even if your divorce is close to being finalized it could be beneficial to delay the process to achieve a more favorable tax result.
On the other hand, filing separately can offer important legal protection as both spouses are jointly and severally liable for the entire return when filing jointly, including any taxes owed or future audit issues—even if the other spouse caused the problem. If this level of trust and transparency does not exist during a contentious divorce, it may well be worth filing separately even if it does result in a higher tax bill.
Once divorced, women with dependent children will generally find that Head of Household status is preferable to filing as single due to its lower tax rates and higher standard deduction. To qualify, the taxpayer must be unmarried on December 31 of the tax year, have paid more than half the cost of maintaining the home and have a dependent reside with her for more than half the year.
Common Misconception: One important item to note is that spouses are not able to negotiate who receives Head of Household status; in other words, only the spouse who actually meets this criteria (usually the custodial parent) can claim the tax status.
Alimony: Understanding the Post-2018 Tax Landscape
For divorces finalized on or after January 1, 2019, the Tax Cuts and Jobs Act (TCJA) brought a fundamental shift to the tax treatment of alimony:
Alimony is no longer considered taxable income to the recipient.
It is not deductible for the payer.
This change significantly altered the dynamics of spousal support negotiations. In prior years, the tax deduction for the paying spouse often led to more generous alimony offers. Without that incentive, many recipients—particularly women who left the workforce or reduced their earning capacity during marriage—now receive less support than in years past.
Prior to the TCJA, women who received alimony could use that income to contribute to an IRA—even if they didn’t have wages or other earned income—because alimony was considered "compensation" under IRS rules. However, for divorce agreements finalized after December 31, 2018, alimony is no longer considered taxable income, and therefore it no longer qualifies as earned income for IRA contribution purposes. This change disproportionately impacts women who may rely on alimony as their sole or primary income after divorce, effectively removing a key retirement savings vehicle unless they have other sources of earned income, such as employment or self-employment.
Child-Related Tax Benefits: More Than Support
While child support itself is not taxable and cannot be deducted by the payer, other child-related tax benefits often become points of contention:
Child Tax Credit (up to $2,000 per child)
Earned Income Tax Credit (EITC)
Dependency exemption rules (now largely suspended, but still relevant for determining credit eligibility)
By default, these benefits go to the custodial parent—defined by the IRS as the parent with whom the child resides for more than half the year. However, parents can agree to allocate these benefits differently. In such cases, IRS Form 8332 must be signed by the custodial parent to release the dependency claim.
Recommendation: Ensure that the allocation of child-related tax benefits is documented clearly in the divorce decree. Include provisions for alternate-year claiming or dividing by child, and build in contingencies for changes in custody or living arrangements.
The Marital Home: Assessing Real Cost vs. Emotional Value
For many divorcing couples, the family home is not only a symbol of shared history but also one of the most valuable assets they own. When it comes time to sell, the tax implications can be significant. Fortunately, Internal Revenue Code Section 121 offers an exclusion of up to $250,000 of capital gain for single taxpayers and up to $500,000 for married couples filing jointly. But divorce adds nuance—and timing, occupancy, and ownership rules all matter. Here’s what you need to know.
To qualify for the exclusion, you generally must:
Have owned the home for at least two years in the five years before the sale.
Have used the home as your primary residence for at least two of those five years.
Not have used the exclusion on another home sale within the prior two years.
For married couples filing jointly, both spouses must meet the use test, and at least one must meet the ownership test, to claim the full $500,000 exclusion.
If one spouse moves out as part of the divorce, they may still be able to count the period their ex-spouse lives in the home toward their own use requirement. The tax code allows an ex-spouse to “tack on” the other’s occupancy if the arrangement is under a divorce or separation agreement that grants one spouse the right to remain in the home.
The ownership test is more straightforward. As long as a spouse has an ownership interest in the home—even if they moved out—time continues to count toward the two-year ownership rule.
The exclusion is available once every two years. If the home is sold while the couple is still married and filing jointly, they may qualify for the full $500,000 exclusion. If the sale happens after the divorce and the home is sold jointly, each ex-spouse may claim up to $250,000 of exclusion separately, provided they meet the ownership and use requirements.
Sometimes, one spouse keeps the home after the divorce and sells it later. The other spouse’s ownership interest may have been transferred tax-free under the divorce settlement. In this case, the spouse who keeps the house can still qualify for up to $250,000 of exclusion on their own, provided they satisfy the two-out-of-five rule. In fact, a spouse who has remarried may qualify for the $500,000 gain exclusion provided the new spouse meets the use test.
If the two-year test isn’t met due to divorce itself, taxpayers may qualify for a partial exclusion. Divorce is recognized as an unforeseen circumstance, and the IRS allows the exclusion to be prorated based on the actual period of ownership and use.
Missed Opportunity Alert: For divorcing couples, coordinating the timing of the sale and clarifying rights to the home in the divorce agreement can preserve significant tax savings. A poorly timed sale or a vague settlement agreement can mean leaving money on the table—or worse, triggering unexpected taxes. Be sure to work with an advisor who’s well-versed in the complexities involved tax issues impacting divorce.
Retirement Assets: Critical, Tax-Sensitive, and Often Overlooked
Retirement accounts often represent the most valuable marital asset, particularly in long-term marriages. Yet they are frequently misunderstood in divorce settlements.
401(k), 403(b), and pension accounts require a Qualified Domestic Relations Order (QDRO) to divide or transfer the account. When done under a QDRO, the receiving spouse can roll the distribution into their own retirement account without tax or penalty. Alternatively, if they take cash directly, the distribution is taxable income—but the usual 10% early withdrawal penalty does not apply, even if they are under age 59½.
IRA transfers do not require a QDRO and a properly executed transfer incident to divorce is tax-free. However, if the recipient spouse withdraws funds after the transfer, the standard IRA rules apply—including income tax and the 10% early withdrawal penalty if under 59½.
Expert Caution: For divorcing couples, both 401(k)s and IRAs can be divided without triggering immediate tax consequences—but the process is different. 401(k)s require a QDRO, while IRAs rely on the divorce decree. And when cash is needed, 401(k) funds accessed through a QDRO can sometimes be tapped without the early withdrawal penalty, a flexibility IRAs don’t offer. Careful planning with a knowledgeable attorney and financial advisor is essential to ensure these valuable assets are divided in the most tax-efficient way possible.
Asset Division: Why “Equal” Is Rarely Equal
Dividing assets on a 50/50 basis may sound fair—but that fairness evaporates if you ignore taxation and liquidity. Consider these examples:
A $300,000 brokerage account with appreciated securities could carry unrealized capital gains taxes.
A $300,000 traditional IRA may be worth significantly less after taxes in retirement.
A $300,000 home carries maintenance obligations, illiquidity, and potential future gains taxes.
Guiding Principle: Focus on net after-tax value and usability. A divorce settlement isn’t just about equality—it’s about creating a sustainable financial path forward.
Joint Returns and Tax Liability Exposure
Many women are unaware that filing jointly during marriage exposes them to joint and several liability for any tax underpayments, penalties, or audit issues—even if the errors were solely their spouse’s doing.
In some cases, relief is available through IRS relief programs including Innocent Spouse Relief, Separation of Liability and Equitable Relief. However, these provisions are complex and not guaranteed.
Protective Strategy: If you suspect tax irregularities or were not involved in previous filings, request prior returns and consult a tax professional immediately as problems with the IRS only get more expensive, more complicated and more difficult to resolve with time. Be sure to discuss including indemnification language in your divorce settlement where appropriate.
Withholding and Estimated Payments Post-Divorce
After divorce, your income, filing status, and eligibility for credits may change significantly. Failing to adjust tax withholding or make estimated payments can lead to underpayment penalties or an unexpected tax bill.
Employees should update their W-4 with their employer to reflect new filing status and dependents.
Self-employed individuals or those receiving alimony should reassess estimated quarterly tax payments.
Advisory Note: A post-divorce tax projection is essential to avoid surprises and cash flow issues, prevent or minimize tax penalties and interest and provide clarity around new obligations.
When spouses make estimated tax payments under one Social Security Number (commonly the husband's), and later divorce or file separately, the IRS automatically attributes those payments entirely to the SSN under which they were made—regardless of where the funds came from. This can create significant problems if those payments were meant to cover joint income or if the spouse not listed (often the wife) needs access to part of that payment when filing Married Filing Separately or after divorce.
The IRS allows spouses to mutually agree on how to divide estimated payments. To do this, you must submit a written statement signed by both parties with your tax return that includes all relevant information including each spouse’s identifying information, the amount of the payments to be allocated to each spouse and a clear statement that both parties agree to the allocation.
Planning Tip: If you're still in the divorce process, address the division of any joint tax payments (including estimates) explicitly in your settlement documents. Once finalized, coordinate with your tax preparer to prepare the proper documentation for filing.
Final Thoughts: Financial Clarity Is a Form of Self-Respect
Divorce is often framed as an ending, but for many women, it is the beginning of long-term financial independence. Understanding the tax consequences of your settlement is not about being greedy or overly cautious—it is about being smart, prepared, and empowered.
Women should not be afraid to:
Ask pointed financial questions
Push for fair, tax-informed outcomes
Seek advice from professionals who understand both the emotional and technical sides of divorce
If you’re navigating divorce and are worried that important tax impacts may be getting missed or overlooked, let’s talk. Together, we can make sure you’re making informed decisions and building a secure financial foundation for your next chapter.
Susan Jones is an investment adviser representative with Savvy Advisors, Inc. (“Savvy Advisors”). Savvy Advisors is an SEC registered investment advisor. This material is presented for informational purposes only and should not be considered a recommendation or personalized advice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Sorelle Wealth Partners is a business name used for marketing purposes. All advisory services are offered through Savvy Advisors. Sorelle Wealth Partners and Savvy are not under common ownership or control.