Back To Top

Tax Planning in Divorce

Almost 50% of marriages end in divorce.  It’s a sobering statistic that affects many families.  In fact, in the U.S. there is one divorce every 36 seconds, or nearly 2,400 divorces per day, 16,800 per week and almost 900,000 per year.  The average marriage that will end in divorce lasts about eight years.  There are several things you should consider that could have significant financial impacts on you and your family if you and your spouse make the difficult decision to end your marriage.  It is important to understand that to obtain an equal division of marital property, you must consider not just the fair market value of the property, but the after-tax value of such property.  Generally speaking, no gain or loss is recognized on transfers of property between spouses or former spouses that are incident to a divorce.

Ready to talk? Reach out to our Private Client Services Team

Last Married Tax Return

Should you file married joint (MFJ), married separate (MFS) or head of household (HOH)?  Before filing your last tax return as a married couple there are several things that you need to consider.  First and foremost is your filing status.  The case for MFJ is that it is probably the simplest, but simplest doesn’t necessarily mean best.  The usage of loss carryovers, division of refunds, children(s) exemption usage, etc., are just a few of the things to consider before selecting your filing status for that final tax return.

Principal Residence

Deciding what to do with the family’s principal residence is often one of the hardest decisions to make as both spouses may have emotional connections to the asset you’ve called home.  If one spouse can afford to keep the home, how will they buy out the other’s interest?  If the now single individual sells the home, is the $250,000 gain exclusion enough to cover the gain when the house is subsequently sold?  Some couples may even decide to continue to own the house together in an effort to keep the kids in the same school district, among other considerations.  This may not be the most advisable outcome as there is a lot that could go wrong both financially and personally by keeping the home in both names.  Selling the home and splitting the money is often the easiest solution and usually provides the greatest tax savings.

Retirement Assets, Pensions/IRA’s

The division of retirement assets could include several complications such as the ability to save for retirement in the future, age differences between spouses and near-term cash requirements.  A Qualified Domestic Relations Order (QDRO) is a federally mandated order required to accomplish the division of various retirement and pension plans.  Most plans require an ex-spouse to file a QDRO with the plan administrator before the plan can pay any portion of plan benefits to that ex-spouse.  Any payments received by an ex-spouse pursuant to a QDRO can be rolled over just as if he or she were the employee receiving a plan distribution.  Without a QDRO, a distribution to an ex-spouse is taxable to the account owner.  An IRA distribution to an ex-spouse can be done tax free and without a QDRO as long as the transfer is under a divorce or separation instrument.  The couple should be careful how that IRA distribution or transfer is done to ensure it is free of any tax.  Beneficiary designations should be reviewed as a step in the process of divorce.


Alimony payments are deductible from income by the payor if they are included in the income of the payee.  To qualify as deductible alimony very specific requirements must be met.  Payments must be made directly to ex-spouse in the form of cash.  Transfers of property or services do not qualify.  The payments must be required as part of a divorce or written separation agreement.  There can’t be anything in the agreement that specifically states that the payment is not alimony or taxable to the recipient spouse.  The payee and payor may not live together.  The payments may not have any child-related contingency (child reaches age 18 etc.), and the payments must stop after payee’s death.

In Conclusion

While no family plans for divorce, it is important that you understand your options and their financial impacts should that day come.  Our Family Wealth Services team is here to help guide you through the difficult maze of financial decisions you will need to make, under what are already stressful and emotional times. Contact us with any questions.

About the Author

Brian Kling, CPA

With over 21 years of public accounting experience, Brian brings his unique relational style to providing real solutions to clients. In addition to individuals, his practice spans a variety of industries and includes tax and business consulting services to closely held companies, corporations, partnerships, and limited liability companies.

To stay on top of national and local changes or trends Brian is an active member with the American Institute of Certified Public Accountants (AICPA) and the Virginia Society of Certified Public Accountants (VSCPA). He also serves as the Treasurer on the Executive Committee and Board of Directors of the Loudoun County Chamber of Commerce.