How Divorce Can Impact Your Taxes

Divorce can change your life in many ways, including how you file taxes. As tax season kicks into high gear, here are some tips for the newly divorced:

Determine Your Filing Status

This will depend on your marital status as of Dec. 31 of the tax filing year. So if your divorce wasn't final until January 2022, your filing status for your 2021 tax return can still be married filing jointly, which has tax benefits. Joint filers have a larger standard deduction — $25,100 for 2021; $25,900 in 2022 — or twice the amount for those filing as single or married filing separately.

You may also qualify for "head of household" status, which has a more generous standard deduction ($18,800 for 2021; $19,400 in 2022) and more preferential tax treatment than filing as single. To qualify, you must be unmarried or have lived apart from your spouse for the last six months of the year, filed a separate return, and paid more than half the costs of keeping up a home for you and a dependent.

(If you're not yet divorced, see The Pros and Cons of Married Couples Filing Separate Tax Returns.)

File a New W-4

This form tells your employer how much tax to withhold from your paycheck. If your filing status changes from married filing jointly to single or head of household, you have 10 days after a divorce to update your W-4 to ensure that enough taxes are being withheld, according to the IRS.

Decide Who Claims the Child Tax Credit

Generally, the custodial parent would claim the child tax credit.

The credit was expanded in 2021 and raised to as much as $3,600 for each child age 5 or younger and $3,000 for those age 6 to 17. For the 2022 tax year, the credit is worth up to $2,000 for each child age 16 or younger.

The noncustodial parent can claim the credit if the custodial parent agrees not to claim an exemption for the child. The custodial parent would need to state so by filling out Form 8332, which the noncustodial parent would submit with his or her return.

Know the Rules on Alimony and Taxes

A 2017 law changed the tax treatment of alimony for those who pay it and receive it. For divorces in 2019 or later, alimony payments are no longer tax deductible, and the recipient doesn't have to pay taxes on the income. For earlier divorces, alimony is still deductible for the payer and taxable for the recipient.

Understand Taxes on Home Sales

Married joint filers can avoid taxes on up to $500,000 of gain on the sale of their principal home, provided they have owned the home and lived there for at least two years out of the last five. If they meet those residency requirements and sell their home after the divorce, each can exclude up to $250,000 of the gain on their individual tax returns.

Note that if you receive the home in a divorce settlement and sell it years later, you'll only be able to avoid taxes on the first $250,000 of profits.