Alimony Tax Rules — Pre-2019 vs Post-2019 Divorce Agreements
TCJA fundamentally changed alimony taxation. For divorce agreements (decrees of divorce/separate maintenance) executed on or after January 1, 2019: alimony paid is NOT deductible by the payer; alimony received is NOT includable in income by the recipient; the recipient does not need to report alimony on their return. For pre-2019 agreements still in effect: alimony paid is deductible by the payer (above-the-line deduction on Schedule 1); alimony received IS taxable income to the recipient (reported on Schedule 1 (Form 1040), line 2a); the old system continues as long as the decree is not modified. If a pre-2019 agreement is modified after 2018 and the parties elect to apply the post-TCJA rules, it converts to the non-deductible/non-taxable treatment. Cash and periodic payments that qualify as alimony: must be paid under a divorce or separation instrument; must not be designated as non-alimony; must not be voluntary or for support of the payer's dependants; payer and recipient must live in separate households.
QDROs — Dividing Retirement Accounts Without Tax
A Qualified Domestic Relations Order (QDRO) is a special court order that allows a divorce to divide employer retirement plans (401(k)s, 403(b)s, pensions, defined benefit plans) without triggering income tax or early withdrawal penalties. Without a QDRO: if you withdraw funds from a 401(k) and give them to a spouse, you pay income tax + potentially 10% early withdrawal penalty. With a QDRO: the plan administrator transfers assets directly to an alternate payee (the receiving spouse) in a qualifying transfer — no tax to the account holder, and the receiving spouse either rolls it to their own IRA (no tax) or takes a direct distribution (taxable income, but no 10% penalty even before age 59½ — the QDRO is an exception). QDRO requirements: must specify the amount or percentage to be paid; name the alternate payee; be reviewed by the plan administrator. Note: IRAs use a different mechanism — a divorce decree or separation agreement directing a trustee-to-trustee transfer is sufficient for IRAs (no QDRO needed). IRA divorce transfers: tax-free if transferred directly between IRAs, not through the account holder.
Home Sale in Divorce — Section 121 Exclusion Rules
The Section 121 primary residence capital gains exclusion ($250,000 single / $500,000 married) has special rules for divorce situations. Standard rule: must own AND use the home as primary residence for 2 of the last 5 years before sale. Divorce exception: if one spouse is required to move out of the home under the divorce agreement (while the other remains), the departing spouse can still count the time the other spouse used the home toward their own 2-year use test. Example: you and your spouse owned and lived in the home for 3 years before you moved out under the divorce decree. Your spouse remained in the home for another 2 years and then the home was sold in the divorce. You may be able to use the $250,000 exclusion even though you didn't personally use the home in the 2 years before sale (IRC §121(d)(3)(B)). Sale as part of divorce: if both spouses are joint owners at time of sale, both can potentially use their individual $250,000 exclusion — total $500,000 excluded even filing separately. Plan the timing of the home sale relative to the divorce finalisation.
Community Property States — Nine States with Special Rules
Nine states treat income earned and property acquired during marriage as community property (owned 50/50 regardless of whose name it is in): Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin (similar marital property). In community property states: income earned by either spouse during the marriage is considered to belong 50% to each spouse; this affects how income is allocated when spouses file separately; community property rules can create income allocation on the tax return even before divorce is finalised (if spouses are separated but not yet divorced — community income must be allocated per the state rules). Non-community property (equitable distribution) states: all other 41 states — assets are divided based on what each party owned, with courts distributing 'equitably'. For spouses in community property states considering separate returns during the year of separation but before divorce: the community income rules require complex income splitting that requires a tax professional.
Filing Status and Claiming Children in Divorce Year
Filing status in the year of divorce: you are considered married for the entire year if your divorce is not finalised by December 31. Options if you are still married (including informally separated, with no final decree of divorce or separate maintenance): Married Filing Jointly (requires both spouses' consent — may be beneficial if one spouse has high income and the other low); Married Filing Separately (worse rates but sometimes necessary if spouses cannot cooperate). Note that a final decree of separate maintenance also makes you unmarried for tax purposes, so joint filing is no longer available. If divorce is finalised before December 31: you are 'unmarried' for the year. Options: Single, or Head of Household (if you paid more than half the costs of maintaining a home for a qualifying child). Head of Household status is significantly more favourable than Single status — lower rates and higher standard deduction. Claiming the child: personal exemptions are permanently eliminated (OBBBA), so the question is who claims the child as a dependent and the Child Tax Credit. The custodial parent generally claims the child by default; the non-custodial parent can claim the child as a dependent and the Child Tax Credit (or credit for other dependents) only with IRS Form 8332 signed by the custodial parent. Form 8332 does not transfer the earned income credit, the child and dependent care credit, or head of household status, which stay with the custodial parent if they otherwise qualify (IRS Publication 501).
Transfer of Property in Divorce — Tax-Free Incidents
Transfers of property between spouses in connection with divorce are generally tax-free: IRC §1041 provides that no gain or loss is recognised on transfers of property between spouses, or between former spouses where the transfer is incident to divorce (occurring within one year of divorce, or within six years if made pursuant to the divorce decree). Tax-free means no immediate tax — but the recipient takes the transferor's carryover basis. Example: a stock portfolio worth $500,000 with a $100,000 cost basis is transferred to the ex-spouse in the divorce. The ex-spouse receives the $500,000 portfolio tax-free — but also inherits the $100,000 cost basis. When the ex-spouse sells the stock, the $400,000 gain is taxable to the ex-spouse. This is a critical negotiation point in divorce: the after-tax value of assets differs based on their embedded gains. A $500,000 brokerage account with $400,000 in built-in gains is worth less after-tax than a $500,000 account with minimal gains — but they look equivalent on a balance sheet.