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Divorce and Taxes

Death and taxes may be inevitable, but tax surprises in a divorce are possible to avoid if you plan ahead. Below is a practical, updated guide to the federal and Minnesota tax issues that come up most often in divorces and custody cases, written for real people (not accountants).

A few key takeaways up front

  1. Alimony (spousal maintenance) is only deductible and taxable in older cases. For most divorces finalized in 2019 or later, it is not deductible to the payer and not taxable to the recipient.  
  2. Child support is never deductible and never taxable.  
  3. For federal taxes, the “custodial parent” is usually the parent the child spent more nights with, even if your court order uses different labels. Form 8332 is the usual way to let the other parent claim certain child related tax benefits.  
  4. Property transfers between spouses (or ex-spouses) during or because of the divorce are generally not taxed at the time of transfer, but the tax bill can show up later when the asset is sold (such as capital gains)
  5. Minnesota has its own child tax credit and dependent exemption rules, separate from federal rules. 

1) Filing status: the “December 31st” rule

Your federal filing status for the year is based on whether you are legally married on the last day of the year (December 31), not whether you were separated for months. Publication 504 explains how the IRS views marital status at year end affects filing status options.  

Common options:

  1. Married filing jointly (often lowest combined tax, but see “joint liability” below)
  2. Married filing separately (can be useful in certain situations, but often higher tax and loss of credits)
  3. Head of household (HOH) (possible after divorce or if you qualify under IRS rules)
  4. Single (typical after divorce if HOH does not apply)

Joint return caution: joint liability

If you file a joint return, both spouses can be responsible for the tax, interest, and penalties for that year, even after divorce. IRS Publication 504 discusses post divorce tax issues, including how to handle withholding and estimated taxes and related rules.  

Practical moves many people forget:

  1. Update W 4 withholding early (not after you get a nasty balance due)
  2. If self-employed or receiving maintenance, consider quarterly estimates
  3. Decide who will claim which credits before filing season, not during a fight.

Pro-Tip:Many times at mediation the issue of tax filing does not come up, this is a usually a mistake, be sure to talk to your lawyer about your plan to file taxes.

2) Spousal maintenance (alimony): What is taxable in 2026?

This is the most common area where older internet articles lead people astray.

Federal rule -the one that matters most

Under IRS guidance:

  1. If your divorce or separation agreement was signed by the Judge before 2019, alimony is generally deductible by the payer and taxable to the recipient.
  2. If it was executed after 2019, the payer cannot deduct it and the recipient does not include it as income.
  3. If it was executed before 2019 but later modified, the treatment can change if the modification expressly adopts the newer rules.  

That means a lot of “my friend deducts it” conversations are just comparing different vintages of divorces.

This may not seem a big deal, but it’s actually a HUGE deal. For example if you are getting $3,000 per month in spousal support from a 2026 divorce decree, this means you are getting $3,000 POST-TAX dollars, if that smae $3,000 came from a a job you’d have to earn close to $4,000/month. The same is true if you’re paying $3,000 per month, you are paying with post-tax dollars so more than likely had to earn over $4,000 to pay that bill.

Tax Disclaimer:

Minnesota maintenance orders often talk about “tax considerations,” but your federal tax treatment is driven by the federal rules above. If your case involves older, pre 2019 maintenance language, it is worth having a CPA confirm how it should be reported for both federal and Minnesota returns.

3) Child support: always tax neutral

Child support is not deductible by the payer and not taxable income to the recipient (the same as spousal support in 2026). The IRS states child support is never deductible and is not considered income for tax purposes.

What does affect taxes is everything that touches child support:

  1. Who claims the child for tax benefits?
  2. Child care expenses and credits?
  3. Health insurance coverage and premium tax credits?
  4. Parenting time schedules (because federal tax rules care about overnights)?
  5. Earned Income credit?

all of these need to be addressed, some in the divorce decree, some just understanding if you can qualify to claim the benefit.

4) Who claims the kids for taxes?

Federal rule: the IRS will follow the State Court’s order regarding Tax Benefits.

For federal purposes, the IRS generally defaults to the custodial parent under its definition (commonly tied to where the child lived more nights during the year).

However, the tax code is silent as to if the state courts can determine who will receive the dependency exemption, and MInnesota cases Rogers v. Rogers, 622 N.W.28 813 (Minn. 2001) supports this.

Minnesota law recognizes the same mechanism

Minnesota statute expressly allows the court to allocate dependency exemptions and require the parent with the child more than half the year to sign the declaration releasing the claim under Internal Revenue Code section 152(e).  

Practical Tips when finalizing your divorce tip MTA:

  1. Put the reference to Form 8332 obligation and timing directly into the judgment and decree (who signs, for which years, and when it must be delivered)
  2. Tie it to compliance (for example, child support current through December 31, or other agreed upon conditions).
  3. Specify rotation by tax year (odd years, even years) instead of vague language like “the parties will alternate”

Remember, the tip goal is to never have to call your divorce lawyer again!

What if both parents claim the same child?

The IRS typically flags duplicate dependent claims and will require proof and then disallow one claim, which is a huge headache, so don’t just file it and hope for the best; get this issue settled.

5) Child Tax Credit amounts (Federal and Minnesota)

Federal Child Tax Credit (as of early 2026)

IRS guidance for the 2025 tax year reflects a $2,200 credit per qualifying child (refundable portion limits apply).  

Because Congress changes these rules periodically, it’s smart to confirm the amounts for the specific tax year you are filing. It’s always a bit technical, so keep in mind these are rough guidelines from a divorce lawyer, NOT a tax lawyer.

Minnesota Child Tax Credit (separate from federal)

Minnesota’s child tax credit is its own refundable credit. Minnesota Revenue describes it as $1,750 per qualifying child beginning with tax year 2024, with phaseouts based on income and procedures for advance payments.  

Minnesota also has dependent exemptions (a subtraction from taxable income) that are separate from federal rules.  

6) Property Division: usually no tax now, but watch the “later” tax

Transfers incident to divorce (federal)

Internal Revenue Code section 1041 generally provides no gain or loss on transfers of property between spouses or incident to divorce, including the “incident to divorce” timing and relationship rules.  

The trap is the Tax Basis(a technical term used by tax folks):

  1. If you receive an asset, you usually receive the other spouse’s tax basis
  2. That means the tax bill can show up when you sell, not when you receive it

Examples where people get burned:

  1. A brokerage account with low basis stock say you bought stock 10 years ago for $1,000 and it’s now worth $50,000. You will be taxed on the $49,.000 increase if you sell it.
  2. A home with a large unrealized gain. $250,000/$500,000 is exempt in 2026, but if you own a $1m home that you purchased for $100,000 and sell it while you’re still single, you’ll be taxed on the $900,000-$250,000 Exemption or $650,000 which is probably going to be around 15%. or $97,000!
  3. Rental property with depreciation recapture
  4. Business interests with embedded gains
  5. Farmland that was a gift (gifts usually are carryover tax basis) extends a LONG time ago

7) The House: capital gains and divorce planning

The home sale exclusion is often:

  1. Up to $250,000 of gain for single filers (if you meet ownership and use tests)
  2. Up to $500,000 for married filing jointly (if both qualify)

IRS guidance explains the ownership and use requirements for excluding gain on the sale of a main home.  

Divorce related planning issues to consider:

  1. If you can sell while still married and you qualify jointly, the larger exclusion can matter
  2. If one spouse keeps the home for years, decree language can become important for whether the spouse moving out can still benefit from exclusion rules (this is fact-specific and worth CPA review)

8) Retirement Accounts: QDRO vs IRA transfer incident to divorce

Retirement accounts are a top source of accidental tax and penalty because they don’t account for the difference between pre-tax and post-tax investment accounts.

401(k) and pensions (qualified plans)

A QDRO is typically required before a plan can pay benefits to an ex spouse as an alternate payee.

Here’s a detailed article of what the heck a QDRO is! (short version is it’s a way to divide 401(k)’s 403(b) and other pre tax accounts.

The mistake that people make is they just assume they can pull, say, the $100,000 out of the 401(k) and they keep it all. That $100K will be taxed at the normal rate, but they usually take 20% on top of the 10% early withdrawal penalty if you are under 59 1/2.

IRAs

IRAs are usually divided via a transfer incident to divorce (not a QDRO). The key is doing the transfer correctly so it is not treated as a taxable distribution.

Practical checklist:

  1. Use the correct legal instrument language (decree or stipulation must be clear)
  2. Transfer trustee to trustee when possible
  3. Do not withdraw and “hand over cash” to the other spouse (that often creates taxes and penalties)

9) Are legal fees deductible?

Not really anymore. Under the current law, divorce attorney fees are generally not deductible for federal income tax purposes in 2026. The Tax Cuts and Jobs Act (TCJA) suspended deductions for legal fees associated with personal matters, including divorce, through 2025. It looks like this is going to be the law going forward as well.

10) A practical divorce tax checklist (what to do before the decree is final)

  1. Decide filing approach for the current year (joint vs separate) and put the agreement in writing.
  2. Address dependent claims clearly:
    • Who claims which child, in which years
    • When Form 8332 must be signed and delivered (if applicable)  
  3. Build tax basis awareness into property division (especially brokerage accounts and real estate).  
  4. Handle retirement divisions with the right tool:
    • Qualified plans: QDRO  
    • IRAs: transfer incident to divorce
  5. Revisit withholding and estimated taxes right away, especially if:
    • You will receive maintenance (no withholding)
    • You are self employed
    • You are changing household size and credits
  6. Update beneficiary designations after divorce (retirement, life insurance, payable on death accounts).