Divorce proceedings present complex financial challenges that extend far beyond the immediate division of marital assets. The intricate tax implications that emerge during marital dissolution often create long-term consequences that can significantly impact your financial well-being for years to come. It is prudent for you to work with your divorce attorney and your CPA to review any settlement terms of a divorce agreement. I asked Wendy Valentino, CPA, a partner at the distinguished accounting firm of Prager Metis CPAs LLC , who regularly counsels executives and high net worth clients, to provide my clients with valuable tax tips to consider at all stages of the divorce process.
1. Key dependent claims.
Claiming dependents after divorce can significantly affect both parents' tax bills. For dependency deductions the child must be under age 19 or a full-time student under age 24. The Child Tax Credit (CTC) for children under 17 provides up to $2,200 per qualifying child for 2025, making dependency decisions financially important. I recommend that the divorce decree explicitly designate which parent will claim each child as a dependent, particularly in shared custody arrangements where both parents may reasonably assume they qualify. In cases involving substantially equal parenting time, I recommend establishing dependency rotation schedules. These dependency claims affect numerous tax benefits, including the Child and Dependent Care Credit, education credits, and eligibility for head of household filing status.
If you have sole custody, you will automatically qualify to get this credit; however, it is something that could be negotiated in the agreement. Without clear provisions, disputes frequently arise when both parents attempt to claim the same child, triggering IRS audits that delay refunds and generate penalties.
Education credits follow dependency rules. The American Opportunity Credit is approximately $2,500 per student for higher education, and if you have no tax liability, you can still get $1,000 refunded to you. The Lifetime Learning Credit (post-secondary education), is approximately $2,000 per return and not per student. There are income thresholds in order to apply for these credits, so consult your tax professional.
2. Single vs. head of household status
Only one person in a divorce situation can file for head of household status per child per year. Single vs head of household have different tax rates, the latter being lower. The higher income spouse would want the head of household status, in order to limit taxes.
The head of household filing status offers significant tax advantages, with a standard deduction of $22,500 versus $15,000 for single filers in 2025. Your divorce decree should specify which parent qualifies annually, along with eligibility for education credits and other dependent-related benefits.
Changes in filing status directly impact your tax liability. Transitioning from married filing jointly to single or head of household status places you in different tax brackets with different rates.
3. Tax refund allocation
Your final joint tax return may generate a refund that requires clear allocation between spouses. Options include equal division, allocation based on respective tax contributions, or assignment of the full amount to one spouse.
I strongly advise documenting this allocation in your divorce decree. The IRS typically sends refunds to the first-named taxpayer unless both spouses authorize alternative arrangements. Pay attention to any overpayment of taxes that are applied to a following year tax return. This is money you could be leaving on the table if you don’t see how that refund is being applied.
It's important to consider potential audit adjustments, as additional taxes discovered subsequently may require the refund recipient to provide reimbursement to their former spouse.
4. Tax liability distribution (joint vs separate tax returns)
Joint tax returns create shared responsibility for any taxes owed, continuing even after your divorce is finalized. Your decree should include comprehensive indemnification clauses protecting each spouse from the other's tax mistakes or unreported income. For situations involving suspected fraud or significant underreporting, explore IRS innocent spouse relief options that can shield you from liability for your former spouse's actions.
Business owners may face significant risk in this area. If your spouse failed to report business income or claimed improper deductions, you could remain liable for resulting taxes and penalties even after divorce.
When going through a divorce, consult with your matrimonial attorney regarding filing jointly vs separately. This decision should also be reviewed with a qualified tax professional, as the choice of filing status can have significant financial implications.
For example, in a W-2 situation, I had a client who earned $1.7 million, and the potential ex-spouse did not work. By filing jointly, the parties were able to save $80,000. Keep in mind that in a W-2 situation, failure to file in the most cost-effective manner possible, could be deemed a wasteful dissipation of marital assets. On the other hand, in a situation where the spouse is a business owner, it is more of a grey area whether to file jointly, as you may be affirming the reporting of income when you don’t have any actual knowledge. This gray area stresses the importance of careful legal and financial guidance during divorce proceedings.
5. Tax treatment of alimony (maintenance)
Alimony tax rules underwent substantial changes following 2018, fundamentally altering negotiation strategies and long-term financial planning considerations for both parties. Spousal support is no longer taxable at the federal or state level. Therefore, for the payor, there is a higher after-tax cost since payments are no longer tax-deductible, while recipients benefit because alimony payments are received tax-free.
If you have an agreement before 2018 (when alimony was taxable) and later modify it, you should make sure your divorce attorney provides language around the taxability of the new support payments. High-earning spouses may find it advantageous to maintain the original structure. The failure to specify whether the new support is taxable will mean that it is not.
6. Equitable distribution of marital assets may have different tax impacts
The division of marital assets between spouses is generally not a taxable event. However, when dividing assets, your divorce attorney and tax professional should be looking at the future tax impact of the assets you are to receive.
For example, if you have a retirement account like an IRA, which is worth $500,000, and a regular brokerage account with $500,000, these two assets are not equivalent. Once you begin taking distributions from the IRA they are taxable at ordinary income tax rates. Conversely, when the investments in the brokerage account, are sold you would incur capital gains taxes ranging from 0-20% based on your income .
Similarly, a Roth IRA and a regular IRA do not have the same tax consequences. When distributing Roth IRA funds, there is no tax due, since the taxes were paid upfront when contributions were made. Conversely, distributions from a traditional IRA are fully taxable as income.
7. Review and adjust tax withholdings post-divorce
Divorce fundamentally changes your tax situation, requiring immediate attention to withholding amounts and estimated payment obligations. Women typically experience a 41% household income drop after divorce, nearly double the decrease men face, making proper withholding calculations even more important.
I recommend updating your Form W-4 with your employer immediately following your marital status change. Consider all income sources when calculating appropriate withholding amounts, including investment income, and business profits. Proper withholding calculations prevent underpayment penalties and excessive over withholding. Accurate calculations prevent cash flow disruptions and unexpected tax liabilities.
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Wendy Valentino, CPA. is a Partner at Prager Metis CPAs LLC, where she focuses her practice on all aspects of the financial picture for high net worth individuals including preparation of business and personal tax returns, tax projections and family office services. Ms. Valentino can be reached at (516)-921-8900 ext 10550 and wvalentino@pragermetis.com for a more comprehensive discussion on tax strategies during and after divorce.