How to Handle Taxes During a California Divorce
If you are going through a divorce in California, taxes are one of those things that can sneak up on you and cost thousands if not handled properly. Understanding the basics now will help you avoid surprises when it is time to file and when you divide assets. Below are the key tax considerations to keep in mind as you move through the divorce process.
Why taxes matter in a divorce
Divorce affects more than just your emotional life and household. Your filing status, who claims the kids, how support is treated, and the allocation or sale of major assets like retirement accounts and real estate all have tax consequences. Small mistakes or poor timing can increase your tax bill or create complications later on.
Filing status: married or single for tax purposes
If your divorce is not finalized by December 31st of the tax year, you are considered married for federal tax purposes for that year. That means you must choose between filing jointly or filing separately.
- Filing jointly: Often results in lower combined tax liability, access to certain credits and deductions, and simpler paperwork. However, both spouses are jointly responsible for the tax return and any liabilities, so filing jointly may not be appropriate in all situations.
- Filing separately: Keeps tax liabilities separate and can be helpful when there is concern about one spouse’s tax issues or when incomes and deductions make separate filing more attractive. Filing separately usually limits access to some credits and deductions and can increase the total tax bill in many cases.
Example: We recently worked with a couple who planned to finalize their divorce before year end. After reviewing their tax situation, it was clear filing jointly produced a far better outcome for that year. We coordinated the divorce timeline around their tax strategy, finalized the judgment in January, and they filed jointly for the previous year—saving them thousands.
Who gets to claim the kids
Who claims the children for tax benefits is often a significant issue. In general, the custodial parent is the one who can claim the children for tax credits and dependent-related benefits. That control can be altered by written agreement in many cases. If the custodial parent agrees to allow the noncustodial parent to claim certain tax benefits, IRS Form 8332 or a similar release is typically used to document that agreement.
Important points:
- Child support is never taxable to the recipient and never deductible by the payer.
- Rules around child tax credits and other child-related benefits can change, so always confirm the current law with a tax professional.
How spousal and child support are treated
How spousal support is taxed depends on when the divorce agreement or court order was executed. For agreements executed after December 31, 2018, alimony or spousal support is generally not deductible by the payer and is not taxable income to the recipient due to changes in federal tax law. For older agreements, the opposite treatment may apply. Child support is not deductible and is not taxable.
Because rules have changed in recent years, review your agreement with a tax professional to know how support payments will affect both parties.
Dividing retirement accounts and selling property
Retirement accounts and real estate are common assets in divorce and carry specific tax rules.
- Retirement accounts: Transfers of retirement accounts between spouses incident to divorce are often handled with court orders called QDROs for qualified plans or with a divorce decree for IRAs and other accounts. A properly executed QDRO or transfer avoids immediate taxation and early withdrawal penalties. The tax consequences depend on the type of account and how distributions are later taken.
- Real estate: Transfers between spouses incident to divorce are generally non-taxable under federal tax law, but selling property after transfer can trigger capital gains tax. The allocation of cost basis, holding period, and timing of sale all influence tax liability.
Because these areas can get technical, coordinating with a tax professional and an attorney is essential to avoid unexpected tax bills and to structure transfers correctly.
Practical steps to avoid tax headaches
- Determine your filing status well in advance of year end. If your divorce will not be final by December 31, plan whether filing jointly or separately is best for you.
- Decide and document who will claim the children. Use appropriate IRS forms if the custodial parent agrees to release claim of certain tax benefits.
- Know how spousal support will be taxed based on the date of your agreement or court order.
- Handle retirement account transfers with the correct court orders or QDROs to avoid early taxes and penalties.
- Understand the tax consequences before selling property. Transfers incident to divorce may be nontaxable, while sales can produce capital gains.
- Keep detailed records. Save agreements, court orders, QDROs, settlement documents, and records of asset values and transfers.
- Consult a tax professional for complex situations such as business income, high asset divisions, or unusual deduction issues.
We coordinated a couple’s divorce timeline around their tax situation and delayed finalization until January so they could file jointly for the prior year. That decision saved them thousands of dollars in tax liability.
How we can help
We review the tax-related parts of your divorce paperwork and connect you with tax professionals when needed. For many amicable cases we offer a flat-fee process that keeps costs predictable while ensuring that retirement account transfers, property divisions, support terms, and filing decisions are handled with tax consequences in mind.
If you want to avoid tax surprises as you move through a California divorce, schedule a free consultation to map out the timeline and tax strategy for your situation. Plan smart, file right, and move forward with peace of mind.
Visit divorce661.com to schedule your free consultation and learn more about coordinating your divorce with tax planning.
