Divorce creates a series of distinct tax issues that operate on different timelines and different legal frameworks — and the most consequential one, joint and several liability on jointly filed returns, does not go away when the marriage ends.
Most people going through a divorce focus on the property split, the alimony terms, and who claims the children. Those matter. But the tax issues that tend to cause the most damage in the years after a divorce are the ones nobody explicitly addressed: the tax liability on a joint return filed three years ago, the built-in gain on appreciated property that was transferred as part of the settlement, or the alimony deduction that no longer exists under a post-2018 agreement.
Filing Status in the Year of Divorce
Your filing status for the year of divorce is determined by your marital status on December 31 — if you were still legally married on that date, you may file jointly or separately.
Filing jointly typically produces the lower combined tax bill — MFJ rates are more favorable and many credits phase out sooner for MFS filers. But filing jointly makes both spouses jointly and severally liable for the entire return. If your spouse has unreported income, overstated deductions, or a liability you don’t know about, filing jointly attaches you to that problem.
A third option, if you qualify: Head of Household (HOH). You may file as HOH if you are considered unmarried for tax purposes (legally separated, or your spouse didn’t live with you for the last six months of the year), you paid more than half the costs of maintaining a home, and a qualifying child lived with you for more than half the year. HOH rates are better than MFS, though not as favorable as MFJ.
Joint and Several Liability — the Tax Consequence That Survives Divorce
Every jointly filed return creates joint and several liability: the IRS can collect the full balance from either spouse, regardless of what the divorce decree says about who is responsible for the tax.
A divorce decree can require your ex-spouse to pay certain taxes — that creates enforceable obligations between the two of you. But it has no effect on the IRS. The IRS is not a party to your divorce. If the liability is on a jointly filed return, the IRS can and will pursue either party, including the one who didn’t know about the problem. Discovery of an ex-spouse’s tax issue can happen years after the divorce is final. This is why the innocent spouse provisions exist.
Innocent Spouse Relief Under IRC § 6015
If a joint return understates tax due to your spouse’s — or ex-spouse’s — erroneous items, you may be entitled to relief from that liability under IRC § 6015.
The statute provides three forms of relief, and they work differently:
- Traditional innocent spouse relief (§ 6015(b)): the understatement is attributable to your spouse’s erroneous items, you didn’t know and had no reason to know, and holding you liable would be inequitable.
- Separation of liability (§ 6015(c)): allocates the deficiency between spouses based on each spouse’s separate items — available if you are no longer married, legally separated, or have not lived together for the past 12 months. This limits your liability to your share; it doesn’t eliminate it.
- Equitable relief (§ 6015(f)): for situations that don’t fit the first two — including cases where the tax was reported correctly but not paid.
Timing: for § 6015(b) and (c), you must request relief within two years of the IRS’s first collection action. There is no filing deadline for § 6015(f) under current guidance. Raise the claim when the IRS first contacts you — not after collection action escalates.
Property Transfers in Divorce — the Basis Problem
Under IRC § 1041, transfers of property between spouses incident to divorce are generally non-taxable events — but the transferee takes the transferor’s basis, which means the built-in gain transfers with the asset.
The short version: if your spouse transfers you appreciated stock or real estate as part of the settlement, you don’t pay tax at the time of the transfer. But you also inherit their cost basis — the original purchase price. When you eventually sell, you recognize the full gain from that original basis, including appreciation that happened before you owned the asset.
‘Incident to divorce’ means the transfer occurs within one year of the marriage ending, or is related to the cessation of the marriage and occurs within six years. Outside those timeframes, § 1041 treatment may not apply.
The practical implication: assets with significant unrealized appreciation should be valued on an after-tax basis when negotiating the property split. A $500,000 brokerage account with a $100,000 cost basis is not equivalent in after-tax terms to $500,000 in cash.
Alimony — Before and After the TCJA
The Tax Cuts and Jobs Act fundamentally changed the tax treatment of alimony for agreements executed after December 31, 2018 — and the change runs in opposite directions for payer and recipient.
Under pre-2019 law, alimony was deductible by the payer as an above-the-line deduction and taxable to the recipient. The tax burden shifted to the recipient, typically in a lower bracket — which often made negotiating higher payments easier because the after-tax cost to the payer was lower.
Under current law — TCJA § 11051, effective for agreements executed after December 31, 2018 — alimony is neither deductible by the payer nor includable in the recipient’s income. The payer pays from after-tax dollars. The recipient receives it tax-free. The deduction benefit is gone.
If a pre-2019 agreement is modified after 2018, the parties can elect to apply the new rules. Most don’t, to preserve the payer’s deduction. But if a modification is being negotiated, the tax consequence of making that election should be part of the analysis.
Children and Tax Benefits After Divorce
The dependency claim — and the credits tied to it — generally goes to the custodial parent, but the parties can transfer it by agreement using Form 8332.
The child tax credit (up to $2,000 per qualifying child), the dependent care credit, and the earned income credit all depend on who claims the child. Under the default rules, the custodial parent — the one with whom the child spends the most nights — claims the dependency. The custodial parent can release the claim to the non-custodial parent for a specific year or multiple years using Form 8332. The release can be revoked prospectively by filing a revocation notice.
One exception: the earned income credit cannot be transferred by Form 8332. It stays with the custodial parent regardless of who claims the dependency.
Frequently Asked Questions
Can a divorce decree protect me from IRS collection on a joint return?
Not as far as the IRS is concerned. A divorce decree can require your ex-spouse to pay certain tax liabilities, but it doesn’t bind the IRS. The IRS can collect from either spouse on a jointly filed return regardless of what the divorce agreement says. Innocent spouse relief under IRC § 6015 is the IRS-side remedy for that situation.
What is innocent spouse relief and do I qualify?
IRC § 6015 allows a spouse or ex-spouse to be relieved of joint tax liability when the understatement or non-payment is attributable to the other spouse’s erroneous items. There are three forms: traditional relief (§ 6015(b)), separation of liability (§ 6015(c)), and equitable relief (§ 6015(f)). Qualification turns on what you knew when you signed the return, your financial involvement in the household, and whether holding you liable would be inequitable.
How does the TCJA change affect alimony?
For agreements executed before January 1, 2019: alimony is deductible by the payer and taxable to the recipient. For agreements executed after December 31, 2018: alimony is neither deductible nor taxable. If a pre-2019 agreement is modified after 2018, the parties can elect the new rules — most don’t, to preserve the deduction.
Who claims the children on taxes after divorce?
By default, the custodial parent claims the dependency. The custodial parent can release the claim to the non-custodial parent using Form 8332. The child tax credit and dependent care credit follow the dependency claim. The earned income credit cannot be released by Form 8332 — it stays with the custodial parent.
The tax issues in divorce don’t resolve themselves, and some of them — like joint liability on old returns — can surface years after the fact. If you’re dealing with innocent spouse relief or need to understand your options for resolving joint tax liability after divorce, we can help you work through the specifics. Book a free 15-minute call.
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