Virginia Divorce & Taxes

Going through a divorce in Virginia brings enough emotional challenges without having to worry about tax complications. However, understanding the tax implications of your Virginia divorce is crucial for protecting your financial future and avoiding costly mistakes during tax season. From filing status changes to alimony treatment and dependency claims, divorce creates significant tax considerations that both spouses must navigate carefully.

How Does Divorce Affect Your Tax Filing Status?

Your marital status on December 31 of the tax year determines your tax filing status for that entire year. This is one of the most fundamental rules about divorce and taxes that catches many people by surprise. Even if you were married for 364 days of the year, if your divorce became final on December 31, you file as single or head of household for the entire year.

If your divorce is not finalized by December 31, you're still considered married for tax purposes for that entire year. This means you must file either as married filing jointly or married filing separately, regardless of how long you've been separated or living apart.

Your Filing Status Options

When your divorce is finalized before December 31, you have two main filing status options: single or head of household. Filing as single is straightforward; you simply file an individual return reporting only your own income and claiming only your own deductions and credits.

Head of household status offers better tax rates and a higher standard deduction than filing as single. To qualify for head of household, you must pay more than half the cost of keeping up a home for yourself and a qualifying person, such as a dependent child. The child must live with you for more than half the year. This filing status can result in significant tax savings compared to filing as single.

If your divorce isn't final by year-end, you can still file as married, filing jointly with your spouse if you both agree. This option typically provides the most favorable tax rates and the highest standard deduction. However, when you file jointly, both spouses are jointly and severally liable for any taxes due, which means the IRS can collect the entire tax debt from either spouse.

What Is Married Filing Separately and When Should You Use It?

Married filing separately is an option when you're still legally married on December 31 but don't want to file a joint return with your spouse. This filing status protects you from liability for your spouse's tax issues, but comes with significant disadvantages.

When you file separately, you typically face higher tax rates than married filing jointly. The standard deduction is lower, and many tax credits become unavailable or reduced. If one spouse itemizes deductions, the other spouse must also itemize, you cannot mix itemizing and taking the standard deduction when filing separately.

When Married Filing Separately Makes Sense

Despite the disadvantages, married filing separately can be the right choice in certain situations. If you're separated and don't trust your spouse to report income honestly or pay their share of taxes, filing separately protects you from their tax liability.

If your spouse has significant back taxes, liens, or other tax debts, filing separately prevents the IRS from seizing your refund to satisfy their obligations. This protection can be valuable when you're in the process of divorcing and need to keep your finances completely separate.

Filing separately also makes sense when one spouse has significant unreimbursed medical expenses. Medical expenses must exceed a certain percentage of adjusted gross income to be deductible. With separate returns showing lower individual incomes, it may be easier to meet this threshold.

Can You Still File Jointly If You're Getting Divorced?

Yes, you can file jointly even while going through a divorce, as long as you're still legally married on December 31. Many divorcing couples choose this option because it typically results in lower overall tax liability than filing separately.

However, filing jointly during divorce requires cooperation and trust. Both spouses must agree on the filing status, share all relevant tax documents, and decide how to split any refund or pay any taxes due. These discussions can be challenging when the relationship has broken down.

Protecting Yourself When Filing Jointly During Divorce

If you decide to file jointly during your divorce proceedings, take steps to protect yourself. Get a written agreement about how you'll split any refund or share responsibility for taxes owed. Consider having the refund deposited into a neutral account that both parties must agree to access.

Make sure you review the entire return before signing it. You're responsible for everything on a joint return, even if your spouse prepared it or their accountant handled it. Understand what income is being reported and what deductions are being claimed.

If you have concerns about your spouse's honesty or tax compliance, consider requesting innocent spouse relief. This IRS provision can protect you from liability for your spouse's tax errors or fraud, but it must be requested within specific time frames and you must prove you didn't know about the issues.

How Are Tax Credits and Deductions Divided After Divorce?

Tax credits and deductions must be allocated between divorcing spouses, and the rules vary depending on the type of credit or deduction and your filing status. Understanding these rules helps you negotiate a fair divorce settlement that considers tax impacts.

The child tax credit is one of the most valuable credits for parents. Only one parent can claim this credit for each child per tax year. Generally, the custodial parent, the parent with whom the child lives for more than half the year, has the right to claim the child tax credit.

Negotiating Dependency Exemptions

However, parents can negotiate who claims children as dependents and takes the associated credits. The custodial parent can sign IRS Form 8332 to release their claim to the dependency exemption, allowing the noncustodial parent to claim the child.

This negotiation often becomes part of the divorce settlement. The higher-earning parent may benefit more from the tax credits, so they might agree to pay additional child support or take less in property division in exchange for claiming the children on their taxes.

For parents with equal custody sharing, the IRS tie-breaker rules determine who can claim the credit if parents can't agree. Generally, the parent with the higher adjusted gross income gets the credit when custody is truly 50/50.

What Are the Tax Implications of Alimony Payments?

The tax treatment of alimony changed dramatically for divorces finalized after December 31, 2018. Understanding whether your alimony is subject to the old rules or new rules is crucial for tax planning.

For divorces finalized before January 1, 2019, alimony payments are tax-deductible for the person paying and count as taxable income for the person receiving them. This means the alimony payor reduces their taxable income by the amount paid, while the recipient must report it as income on their tax return.

The Tax Cuts and Jobs Act Changes

The Tax Cuts and Jobs Act of 2017 eliminated the tax deduction for alimony for any divorce or separation agreement executed after December 31, 2018. Under the new rules, alimony payments are no longer tax-deductible to the payor and are not taxable income to the recipient.

This change significantly impacts how couples negotiate alimony. Under the old rules, there was a tax benefit to paying alimony because the payor could deduct it. Often, payors were willing to pay somewhat more because of the tax savings. Under the new rules, there's no tax incentive, which may reduce the amounts offered.

If your divorce was finalized before 2019, you follow the old rules, and your alimony remains deductible and taxable. However, if you modify your divorce decree after 2018 and the modification specifically states that the new tax treatment applies, your alimony could shift to the new non-deductible, non-taxable treatment.

Are Child Support Payments Tax Deductible?

No, child support payments have never been tax-deductible for the payor and have never counted as taxable income for the recipient. This treatment hasn't changed and applies to all child support regardless of when your divorce was finalized.

It's important to distinguish child support from alimony in your divorce settlement because they receive different tax treatment. Child support is specifically for the benefit of children and is not considered income to either parent for tax purposes.

Why the Distinction Is Important

If your divorce decree doesn't clearly separate alimony from child support, the IRS may treat all payments as non-deductible child support. This can create significant tax problems, especially for divorces finalized before 2019, where the payor is expected to deduct alimony payments.

Your divorce settlement should explicitly state which payments are alimony and which are child support. The amounts should be listed separately with clear payment schedules for each. This documentation protects both parties and ensures proper tax treatment.

Child support payments also don't affect eligibility for tax credits like the child tax credit or the earned income tax credit. These credits are based on other factors like household income and the number of qualifying children in your household, not on whether you pay or receive child support.

How Does Property Division Affect Your Taxes?

Property transfers between spouses as part of a divorce are generally tax-free events. Under Section 1041 of the Internal Revenue Code, transfers of property between spouses or former spouses incident to divorce don't trigger immediate tax consequences for either party.

This means you can divide assets like investment accounts, real estate, and personal property without worrying about capital gains taxes at the time of transfer. However, the tax implications don't disappear; they're just postponed.

Basis Transfer

When property transfers between spouses in a divorce, the recipient spouse takes over the transferor's basis in the property. Basis is essentially what was originally paid for the property plus improvements, minus depreciation.

This basis transfer matters when you eventually sell the property. You'll owe capital gains tax on the difference between the sale price and the transferred basis, not the value when you received it in the divorce. This can create a nasty surprise if you don't understand the tax implications.

For example, if your spouse bought stock for $10,000 that's now worth $50,000, and you receive it in the divorce settlement, your basis is $10,000. When you sell it for $50,000, you owe capital gains tax on the $40,000 gain, even though you only "received" it at $50,000. Understanding this helps you negotiate fair settlements that account for built-in tax liabilities.

What Happens to Retirement Accounts in Divorce?

Retirement accounts represent significant assets in many divorces and come with important tax considerations. Different types of retirement accounts follow different rules for division and taxation.

Qualified retirement plans like 401(k)s and 403(b)s require a Qualified Domestic Relations Order (QDRO) to divide the account between spouses. A QDRO is a legal document that instructs the plan administrator to pay a portion of one spouse's retirement account to the other spouse.

Tax Treatment of QDRO Distributions

When retirement assets transfer via QDRO, the transfer itself is not a taxable event. However, the recipient spouse faces important tax decisions. They can roll the money into their own retirement account, where it continues to grow tax-deferred, or they can take a cash distribution.

If they choose the cash distribution, they must pay income tax on the amount received. However, they may qualify for an exception to the 10% early withdrawal penalty that normally applies to distributions before age 59½. This one-time exception only applies to QDRO distributions taken directly rather than rolled over.

IRAs don't require QDROs for division. The divorce decree or separation agreement serves as authorization for the custodian to split the account. Like QDRO transfers, IRA transfers between spouses incident to divorce are not taxable events, and the recipient takes over the account with the same basis.

How Should You Handle Tax Refunds and Debts?

Tax refunds and tax debts can become contentious issues in divorce. If you filed jointly for years prior to your divorce, you may have refunds coming or taxes owed that need to be addressed in your settlement.

For tax refunds from jointly filed returns, the divorce settlement should specify how they'll be divided. Common approaches include splitting them 50/50, allocating them based on income percentages, or using them to offset other marital debts or assets.

Dealing with Joint Tax Liabilities

Tax debts from joint returns are more complicated. When you file jointly, both spouses are "jointly and severally liable" for the full amount of tax owed. This means the IRS can collect the entire debt from either spouse, regardless of who actually earned the income or caused the tax liability.

Your divorce decree can specify which spouse is responsible for paying joint tax debts, but this doesn't bind the IRS. If the spouse assigned the debt doesn't pay, the IRS can still pursue the other spouse for the full amount. The paying spouse would then need to seek reimbursement from their ex-spouse based on the divorce decree.

To protect yourself from your ex-spouse's tax issues, consider requesting innocent spouse relief, separation of liability relief, or equitable relief from the IRS. These provisions can limit or eliminate your liability for taxes on a joint return, but they have strict requirements and deadlines.

When Should You Update Your Tax Withholding?

As soon as your divorce is finalized, update your tax withholding with your employer. Your marital status affects how much tax gets withheld from your paycheck, and failing to update it can result in owing large amounts at tax time or having too much withheld throughout the year.

Complete a new Form W-4 with your employer reflecting your new filing status. If you'll be filing as single instead of married, you'll likely need more tax withheld from each paycheck. If you're claiming children as head of household, you might need less withholding.

Adjusting for Alimony and Support

If you're paying alimony that's tax-deductible (for divorces finalized before 2019), you may want to reduce your withholding since you'll have a deduction that lowers your taxable income. Conversely, if you're receiving taxable alimony, you should increase withholding or make estimated tax payments to avoid underpayment penalties.

Child support doesn't affect withholding calculations since it's neither deductible nor taxable. However, the loss of income from divorce or the change in household size may necessitate withholding adjustments even without tax law changes.

Consider working with a tax professional to calculate your new withholding needs. Getting this right helps you avoid surprises at tax time and ensures you have appropriate cash flow throughout the year.

Do You Need to Report Your Name Change?

If you changed your name back to your maiden name or another previous name as part of your divorce, you must notify the Social Security Administration promptly. Your name on your tax return must match Social Security Administration records, or your return will be rejected.

Contact the SSA to update your name in their system. This process can take several weeks, so don't wait until tax season. If your tax return is rejected because of a name mismatch, you'll need to file a paper return instead of e-filing, which delays any refund significantly.

Updating Other Tax-Related Information

Beyond your name, update your address with the IRS if you moved as part of your divorce. File Form 8822 to notify them of your new address. This ensures you receive important tax notices and correspondence at the correct location.

Update your dependent information if you have children. Make sure you know which parent will claim them each year based on your divorce settlement. Keep Form 8332 on file if you're the noncustodial parent claiming a child based on the custodial parent's release of the exemption.

Review your state tax obligations as well. Virginia's tax filing status generally follows your federal filing status, but there are specific rules for residents, part-year residents, and nonresidents that may affect how you file your Virginia return.

What Tax Records Should You Keep from Your Marriage?

Even after your divorce is finalized, keep all tax records from your marriage for at least seven years. You may need these records if the IRS audits a joint return from during your marriage or if disputes arise about tax liabilities or refunds.

Keep copies of all joint tax returns filed during your marriage, along with all supporting documentation like W-2s, 1099s, receipts for deductions, and records of estimated tax payments. Keep records showing how tax refunds were divided or how joint tax debts were paid.

Documentation for Future Protection

If your divorce settlement assigned certain tax liabilities to your ex-spouse, keep copies of the settlement agreement showing these provisions. While this doesn't protect you from IRS collection efforts, it provides evidence if you need to seek reimbursement from your ex-spouse.

Keep records of the property basis for assets you received in the divorce. When you eventually sell investments, real estate, or other property received from your spouse, you'll need to know the original basis to calculate your capital gains correctly.

Maintain records of alimony paid or received, especially for divorces finalized before 2019, where alimony remains deductible and taxable. The IRS may request verification of these amounts, and proper documentation protects you during an audit.

Are Legal Fees from Your Divorce Tax Deductible?

Generally, legal fees related to getting a divorce are not tax-deductible. Personal legal expenses, including those for divorce proceedings, don't qualify for deductions under current tax law.

However, there are limited exceptions. Legal fees related to tax advice within your divorce may be deductible. If your attorney provided advice about the tax implications of your settlement, the portion of their fees attributable to that tax advice could qualify as a tax preparation expense.

Deductible Legal Fee Exceptions

Legal fees related to obtaining taxable alimony may be deductible for the recipient spouse (for divorces finalized before 2019). Since the alimony will be taxable income, the costs of obtaining that income stream may qualify as a business expense.

Legal fees related to the operation of your business or the preservation of income-producing property might also be deductible or capitalized and added to the basis of the property. For example, if you own a business and your attorney helped you retain ownership in the divorce, those fees might relate to business preservation.

To claim these deductions, you'll need detailed billing statements from your attorney breaking out what portion of their services related to tax matters, alimony negotiations, or business preservation versus general divorce proceedings. Most attorneys can provide this breakdown if requested.

How Does Divorce Affect Your Tax Bracket?

Divorce can significantly impact your tax bracket, often pushing you into a different marginal tax rate than when you were married. Understanding this helps with tax planning and budgeting for your post-divorce financial life.

If you were married, filing jointly with a combined income that placed you in a higher tax bracket, splitting into two single returns (or one single and one head of household) might result in lower overall tax liability. This happens because you each get separate standard deductions, and tax brackets start over at zero for each person.

Planning for Tax Rate Changes

However, if you were the lower-earning spouse and now file separately, you might end up in a higher tax bracket than when filing jointly. The married filing jointly tax brackets are wider than single filer brackets, so splitting your income across two returns doesn't always result in tax savings.

Virginia's income tax rates range from 2% to 5.75%, with the highest rate applying to taxable income over $17,000. This relatively low threshold means most Virginia taxpayers hit the top marginal rate. The filing status change affects Virginia taxes primarily through the standard deduction amount rather than the brackets themselves.

Consider running tax projections for the year of your divorce and the following year to understand how your tax liability will change. This information helps you plan your budget, adjust withholding appropriately, and make informed financial decisions during settlement negotiations.

When Should You Consult a Tax Professional?

Given the complexity of Virginia divorce and taxes, consulting with a qualified tax professional is almost always worthwhile. CPAs, enrolled agents, and tax attorneys can provide guidance specific to your situation that generic information cannot.

Schedule a consultation before finalizing your divorce settlement if possible. Tax professionals can review the proposed settlement and identify tax implications you might not have considered. They can suggest alternatives that might save both spouses money or shift tax burdens more fairly.

Coordinating with Your Divorce Attorney

Work with both a family law attorney and a tax professional during your divorce. Your divorce attorney understands Virginia family law and can negotiate a settlement that protects your interests. Your tax advisor understands the tax implications and can ensure the settlement is structured tax-efficiently.

These professionals should communicate with each other about your case. Your divorce attorney needs to understand tax implications when drafting settlement language, while your tax advisor needs to understand the legal constraints and requirements of your divorce to give accurate advice.

Consider working with a Certified Divorce Financial Analyst (CDFA) who specializes in the financial aspects of divorce, including taxes. These professionals bridge the gap between legal and financial planning, helping you understand the long-term financial impact of settlement options.