How Does Divorce Impact Your Taxes?

In Arizona, getting divorced changes everything from your filing status to whether you can claim the kids as dependents. If you’re not prepared, tax day may come with some unpleasant surprises. Here’s what you need to know to protect your finances when your marriage ends.

The Impact of Divorce on Your Filing Status

Once your divorce is finalized, your tax situation shifts immediately. Your marital status on December 31 determines whether you file jointly or separately for the year. Filing jointly often results in a lower combined tax bill, but it can also mean you’re on the hook for your former spouse’s mistakes. After divorce, you’ll file as single or head of household, depending on your living situation and whether you qualify to claim a dependent.

Tax Filing During Divorce Proceedings

If your divorce is still in progress when April 15 rolls around, you and your spouse must decide how to file. This choice could affect your refund or balance due, so run the numbers both ways with help from a tax professional before deciding.

Transferring and Dividing Assets Between Divorcing Spouses

Arizona is a community property state, meaning most income and assets acquired during the marriage are divided equally. Transfers between spouses during divorce are generally not taxable. However, withdrawals from retirement accounts, such as a 401(k), can be.

A qualified domestic relations order (QDRO) allows you to divide retirement accounts without triggering penalties, but taxes may apply when the recipient withdraws funds later. For example, if you receive part of your spouse’s 401(k) in the divorce settlement, you shouldn’t owe taxes immediately, but the IRS will be waiting when you take distributions.

Back Taxes and Spousal Support Payments

The Tax Cuts and Jobs Act changed the way spousal support payments are treated. For divorces finalized on or after January 1, 2019, the paying spouse can’t deduct them on their tax return, and the recipient doesn’t pay income tax on them. When negotiating spousal support, the amount you agree to should be manageable after factoring in the tax implications of divorce and other financial obligations.

If you and your spouse filed joint returns in previous years and still owe taxes, the IRS can come after either of you, regardless of who agrees to pay these back taxes in your divorce agreement. The only exception is if you qualify for “innocent spouse relief,” which may be granted if you can prove you didn’t know (and had no reason to know) about your spouse’s understatement or unpaid tax.

Joint Legal Decision-Making and Claiming Dependents on Taxes

Who gets to claim the children on their taxes? It’s not always the spouse with the most parenting time. Arizona law allows parents to agree on this or have the court decide. Sometimes parents alternate for years. Other times, the higher-income parent claims the child for a bigger tax benefit, with both parties agreeing to share the savings indirectly. Be sure your divorce agreement clearly states who claims each child in which year to avoid confusion and IRS disputes.

Choose the Law Office of Hector A. Montoya, P.L.L.C.

The tax changes after divorce can be complicated to work through. With over 30 years of family law experience and a background in business and finance, Hector A. Montoya offers informed strategies to protect what you’ve worked hard to build. He can offer clear, confident guidance on dividing assets, negotiating spousal support, and answering complex tax questions. Get in touch today to schedule a consultation with our Tucson and Pima County family lawyer.