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Divorce

A divorce, annulment, or legal separation might complicate your return. Take an active role in how your divorce decree is written, and understand the terms in it. The more familiar you are with your agreement, the better you'll understand the tax implications.

Divorce or other change in your family structure can affect some health insurance payments. This is true if you both:

  • Bought health insurance on a state or federally facilitated health insurance marketplace
  • Received an advance of the premium tax credit for the insurance

You need to inform the marketplace of changes in your family structure, like divorce, marriage, adoption, or job changes. Those changes can affect your monthly payment.  

Alimony

Alimony is deductible by the payer, and it's taxable income to the payee. Alimony is also known as spousal maintenance or spousal support. Both the payer and payee should have alimony payments clearly defined in the divorce agreement.

If you pay alimony, you don't have to itemize to deduct it. If you receive alimony, you might need to make estimated tax payments or increase your withholding on income you earn from your job. Treat alimony as earned income for purposes of eligibility to make an IRA contribution.

A payment to a spouse under a divorce or separation agreement executed after 1984 is treated as alimony if it meets these requirements:

  • The payment is in cash.
  • The agreement doesn't designate the payment as not alimony.
  • The spouses don't file a joint return.
  • The spouses aren't members of the same household at the time the payments are made.  If you and your former spouse used to share a home, you can’t divide the home into two living spaces to defeat that requirement. However, there is a one-month buffer period.  Also, the payments might be treated as alimony -- even if the spouses live in the same household -- if both of these apply:
    • The spouses aren't legally separated under a decree of divorce or separate maintenance.
    • The payments are made under a written separation agreement or temporary support order.
  • There's no liability to make any payment -- in cash or property -- after the death of either spouse.
  • The payment isn't treated as child support.

Children

Child support isn't deductible by the payer, and it's not income to the payee.

Which parent claims the child exemption depends on the parents' custodial or noncustodial status. The custodial parent is usually the parent the child lives with for more nights in the tax year. The other parent is the noncustodial parent.

If you're the custodial parent, you can claim the child as a dependent. However, if the noncustodial parent has the custodial parent's consent, he or she can claim:

  • Dependent exemption
  • Child tax credit, if applicable

The custodial parent must complete Form 8332 to release the child's tax benefits to the noncustodial parent. Then, the noncustodial parent must attach one of these to the return to claim the child's tax benefits:

  • Form 8332
  • Pages from a pre-2009 divorce decree covering the child's tax dependent status

The custodial parent might still qualify as head of household and might be eligible for these tax benefits for that child:

  • Earned Income Credit (EIC)
  • Child and dependent care credit
  • Exclusion for childcare benefits

However, if the custodial parent releases the dependency exemption, that parent also releases the right for the noncustodial parent to claim:

  • Child tax credit
  • Additional child tax credit

The noncustodial parent can never claim:

  • Head of household filing status
  • EIC
  • Child and dependent care credit
  • Exclusion for dependent care assistance benefits

This applies even if the custodial parent released the dependency exemption.

Even if custody is spelled out clearly in the decree, a legal decree usually can't trump the tax law definition of custodial parent. If there's any confusion, the IRS might disallow the claiming rights of either parent.

Head of household status

To qualify to file as head of household:

  • You must be either unmarried or considered unmarried (see below) on the last day of the year.
  • A qualifying person must have lived in your home for more than half the year. However, if the qualifying person is your parent, he or she doesn't have to live with you.
  • You must have paid more than half the cost of keeping up your home for the year.

If a person is your qualifying child, that child is a qualifying person, even if you can't claim the exemption for that child. However, if the child is married, the child isn't a qualifying person unless you can claim an exemption for the child. Any other person is a qualifying person only if you can claim the exemption for that person. If you'd like to learn more about the rules for a person who isn't your qualifying child, see Publication 501.

To be considered unmarried, all of these must apply:

  • You must file a separate return.
  • Your spouse must not have lived in your home in the last six months of the tax year. Your spouse is considered to have lived in your home even if he or she is temporarily absent due to special circumstances.
  • You must have paid more than half the cost of keeping up your home for the year.
  • Your home must have been the main home of your child, stepchild, or eligible foster child for more than half the year.
  • You must be able to claim an exemption for the child. However, if the noncustodial parent is claiming an exemption for the child since you signed Form 8332 (see above), you still meet this last requirement.

IRAs and employer-provided retirement plans

Your qualified domestic relations order (QDRO) addresses how the divorce affects your IRAs and employer-provided retirement plans.

A QDRO is a decree, judgment, or court order that relates to benefits paid to your:

  • Child
  • Spouse
  • Former spouse
  • Dependent

To be considered a QDRO, a document must meet specific requirements. If your plan doesn’t meet requirements, you could face unintended tax consequences.

If you'd like to learn more, see Publications 504 and 575 at www.irs.gov.

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