Does the IRS Know When You Get Divorced? Exploring the Tax Implications

Around 50% of all first marriages end in a divorce. The divorce statistics are much higher for second or third marriages, so many Americans will go through a divorce at some point in their lives.

As gut-wrenching as it can be, this life-altering event doesn’t only have emotional consequences because its tax implications can also have far-reaching effects. Hence, if you’re in the process, you might be concerned about how the IRS knows when you get divorced.

In most cases, you’ll have to inform the IRS that you got divorced by changing the filing status on your tax return and submitting the documents that prove your eligibility for a certain status.

However, this isn’t the only tax implication of a divorce. Let’s see how ending your marriage will affect your federal taxes.

Filing and Paying Taxes During a Divorce

On average, a divorce takes between six and twelve months. Your filing status will remain unchanged, even if you’re legally separated from your ex-partner.

Consequently, you can choose between Married Filing Jointly and Married Filing Separately until the divorce becomes official. The IRS will hold you and your spouse equally responsible for any tax liabilities if you decide to file a joint return.

The divorce doesn’t exempt you from the responsibility for the taxes owed by your ex-partner, so if they don’t pay their federal income taxes on time, the IRS will attempt to collect the debt from you.

The IRS may also hold you responsible if your ex-partner underreports their income or claims credits they’re ineligible for.

If you suspect that your ex-spouse is being dishonest about their income or that they might attempt to evade taxes choosing the Married Filing Separately filing status will ensure that the IRS cannot collect their debts from you.

Changing the Filing Status After the Divorce

In the IRS’ eyes, you’ll remain married for the current tax year if the divorce isn’t finalized by December 31 of that year.

For instance, if you filed for a divorce in 2022 but the court reached the final decision in March 2023, you should still choose Married Filing Jointly or Separately on your 2022 tax return, filed by April 18, 2023.

However, suppose the divorce was finalized on December 31, 2022, or earlier. In that case, you must change your filing status to Single or Head of Household on the return you file by April 18, 2023.

In this case, you must file Form 14824 and the divorce decree with the tax return to prove your eligibility for the filing status you claimed. Your filing status will be Single after the divorce unless you qualify for the Head of Household status.

To claim this filing status on a tax return, you must meet all the conditions below:

• You and your ex-partner didn’t live for more than six months in the same household.
• Your child has lived with you for over six months.
• You covered over 50% of the household expenses throughout the year.

Filing a Tax Return After a Divorce

Changing your marital status will affect many factors that determine how much taxes you must pay to the IRS.

Most notably, the filing status will affect the income you report on the tax return, your tax bracket, and standard deductions. The IRS adjusts standard deductions annually. Taxpayers with Single filing status can claim a $13.850 deduction in 2023.

You can claim a $20,800 deduction in 2023 if you qualify for Head of Household status. The tax credits you can claim on a return will depend on the court ruling and your income.

Suppose the court gives your child custody to your ex-partner. In that case, you may not be able to claim them as dependents or qualify for Earned Income Tax Credit, Child Tax Credit, and other tax credits.

As a result, it’s paramount to agree with your ex-partner, who will claim your children as dependents on their tax return and Form W4.

You may also have to pay federal income taxes on assets you liquidate or receive during a divorce. Hence, your tax liability could increase if the court grants you a family home or other property.

However, most property transfers between ex-spouses don’t involve gains or losses. But you must include them on the return you file after the divorce is finalized. The IRS may require you to report the transaction as a gift and file a gift tax return.

Updating the Form W4 Information

The information your employer uses to withhold taxes will become obsolete after the divorce is finalized. You must upgrade your marital status, number of dependents, and filing status on the new Form W4 you submit to your employer.

Also, you may have to reduce the number of dependents you claimed on this form if you agreed to allow your ex-partner to claim your children on their tax return and Form W4. Remember that only one parent can claim children as dependents for tax purposes.

These changes will affect the amount your employer withholds from your wages and, in some cases, reduce your net salary. You’ll have ten days after the divorce to give your employer a new Form W4.

Failing to update the withholding information after a divorce might prompt the IRS to issue a lock-in letter and instruct your employer to withhold taxes at a predetermined rate.

Reporting Alimony and Child Support

The rules for the taxation of alimony changed in 2019. The Tax Cuts and Jobs Act of 2017 affects all divorces finalized from 2019 onward because individuals paying alimony can no longer deduct it from their taxable incomes.

Individuals who receive alimony payments cannot treat it as taxable income even though they must report it on their tax returns. However, if your divorce was finalized in 2018 or earlier, you can deduct alimony from your taxes.

Parents responsible for paying child support cannot deduct these payments from their taxable income. But they must report them on their tax returns.

The same applies to parents who receive child support, as they can’t add these funds to their taxable incomes. The only difference is that they don’t have to report child support payments on tax returns.

Child support recipients cannot use it to qualify for Earned Income Tax Credit. Depending on the agreement between parents, a person making child support payments may be able to claim a child as a dependent on their return, even if the child lives with the other parent.

Other Tax Implications of a Divorce

The complexity of a divorce depends, among other things, on the assets a couple owns when they file for a divorce. The so-called equitable distribution principle usually governs the division of property between partners in divorce.

The principle involves a fair but unequal distribution of assets to each spouse. Sometimes, the divorce process requires forensic accounting to ensure that all financial information presented to a judge is accurate before applying the equitable distribution principle.

Judges must share any discrepancies between the presented information and information uncovered by forensic accounting with the IRS.

The agency has three years to conduct an audit based on this information. But the statute of limitations increases to six years if the discrepancy is 25% or higher.

There’s no statute of limitations for cases involving tax fraud. Also, the IRS offers several types of innocent spouse relief in cases where one of the partners was unaware of the other’s tax violations.

Frequently Asked Questions

Preparing for Tax Implications of a Divorce

Ending a marriage is never an easy decision. The never-ending court hearings, property disputes, and child custody negotiations are energy-draining, so you may forget to consider their tax implications.

Your tax obligations will depend on the outcome of the divorce process. Hence thinking ahead and entering the process fully prepared is the best way to ensure you won’t face a sizeable tax liability once the divorce is finalized.