Tax Issues in Divorce: Before and After Tax Reform – Part I


By: Justin T. Miller. J.D., LLM., TEP. AEP®, CFP®

Published Date: Feb 1, 2021

This is a three-part piece focusing on tax issues in divorce before and after tax reform. Stay tuned for pieces in the February and March issues, which will be discussing many other aspects including dependency exemptions and child tax credits, sale of principal residence exclusion, deductions related to divorce, support trusts in lieu of alimony and more.



 The emotions experienced by a client going through a divorce or marital dissolution[1] often include grief. sadness. depression, anger, rejection, despair, shock, fear, bitterness, denial, and guilt. Given the emotional and financial toll of divorce, the last thing a client needs is a tax problem- with the Internal Revenue Service (Service) or state tax authorities-on top of a divorce.

Unfortunately, the problems caused by poor tax planning may not become apparent until months or even years after a divorce. and those tax problems may be difficult and expensive to fix. If advisors address the tax issues upfront, while a client is negotiating the terms of a divorce or marital dissolution, the client could end up with more money in the long run-and the ability to sleep better at night. To help make divorce a less “taxing”[2} experience, this article will discuss the following 10 issues that typically should be considered when dissolving a marriage, especially when one or both spouses has a high net worth with more complicated planning needs: (1) tax filing status; (2) dependency exemptions and child tax credits; {3) sale of principal residence exclusion; (4) mortgage interest deductions; (5) deductions related to divorce; (6) allocation of tax carryovers; (7) payments after divorce-such as child support, alimony, and life insurance premiums; (8) qualified retirement plans and individual retirement accounts (IRAs); (9) property transfers and division of appreciated property; and (10) support trusts.




Two major tax issues all divorcing spouses need to consider are when to time the divorce and how to file for tax purposes. The federal income tax filing status options for married taxpayers are (1) married filing jointly,[3] which typically is the most tax-efficient filing status, or (2) married filing separately, which may be more desirable in certain limited circumstances, such as limiting potential joint liability.[4] The federal income tax filing status options for unmarried taxpayers are (1) single, (2) head of household, or (3) qualifying widow(er).[5]


Timing of Divorce


Tax filing status is set by the spouses’ marital status on the last day of the tax year[6]- typically December 31.[7] In general, spouses are treated for tax purposes as married for the entire year, even if they are separated, when they have not obtained a final decree of divorce or separate maintenance by the last day of the tax year.[8] If spouses are considered legally divorced[9J or “considered unmarried” under a legally binding separation agreement[10] on the last day of the tax year, each spouse must file as single or head of household.[11]


Example 1. Amy and Bob are in the process of dissolving their marriage.[12] They are both successful attorneys who each make

$500,000 per year. Amy and Bob would not be in the highest tax bracket as single people in 2018, but they would be in the highest tax bracket if married.[13} Accordingly, to avoid a marriage tax penalty, they may want to speed up the divorce process and finalize it this year.


A Married Filing Jointly

While married filing jointly may provide a better tax result for both spouses versus married filing separately,[14] a major risk to consider is that each spouse may be held responsible, jointly and individually, for the tax and any interest or penalty due on their joint tax return.[15] This means that one spouse may be held liable for all the tax due, even if all of the income was earned by the other spouse.[16)Each spouse is jointly and individually responsible for any tax, interest, and penalties due on a joint return for a tax year ending before the divorce,  even if the divorce decree states that the other spouse will be responsible for any amounts due on previously filed joint retums. (17]

Example 1. Assume Ella has filed for divorce from Frank, but the divorce process could take several years. Frank is an international arms dealer with a team of attorneys and accountants who have helped him create a labyrinth of entities and trusts with accounts at different financial institutions throughout the world. Ella is a practicing medical doctor who has inherited a significant sum from her grandparents, which would be her separate property. Ella, who has been busy with her medical practice, has not been involved with the family’s finances or tax preparation. Frank could be subject to substantial taxes, penalties, and interest due to the failure to pay taxes or report many of his international holdings-for example, noncompliance with the Report of Foreign Bank (FBAR) and Financial Accounts and Foreign Account Tax Compliance Act[18] (FATCA) rules. If Ella were to file as married filing jointly with Frank,

she may be held liable by the Service for the entire amount of such taxes, penalties, and interest. While she may be entitled to relief,[19] the process to obtain such relief could be expensive and time-consuming, and there is no guarantee that she will be granted relief. Accordingly, Ella may be much better off by filing as married filing separately.

In some cases, a spouse may be relieved of the tax, interest, and penalties on a joint return.[20] A spouse may request relief from the Service regardless of the size of the liability.[21] Generally, three types of relief are available, and each kind of relief has different requirements.[22] A spouse must file IRS Form 8857, Request for Innocent Spouse Relief,[23] to request relief under any of three following categories: (1) innocent spouse relief; (2) separation of liability relief; or (3) equitable relief.

Under the “innocent spouse” rule, a spouse may not be responsible for the former spouse’s failure to pay taxes that were due while they were married and filing joint returns.[24] The requesting spouse must file the request for relief within two years of the first collection action.[25] In determining whether the spouse qualifies for relief, the Service will consider the innocent spouse’s level of financial sophistication and the specific circumstances of the tax error.[26] To be considered an innocent spouse, that spouse must be able to prove:


  1. The spouse filed a joint return and there was an understatement or misrepresentation of information that directly relates to the former spouse’s items;
  2. The spouse did not know at the time, and had no reason to know, of the former spouse’s misrepresentations on the joint tax return; and
  3. Taking into consideration all the facts and circumstances, it would be unfair to hold the spouse [27]


Separation of liability relief applies to joint filers who are divorced, widowed, legally separated, or who have not lived together for the 12 months ending on the date election of this relief is filed.[28] The requesting spouse must file within two years of first collection action,[29] and the Service has the burden of proving that the requesting spouse had knowledge of understatement or underpayment.[30]

Equitable relief applies if the requesting spouse does not qualify for innocent spouse or separation of liability relief, if (1) the requesting spouse had no knowledge of the understatement or underpayment; and (2) it would be inequitable to hold the requesting spouse liable.[31] Married persons who live in community property states, but who did not file joint returns, also may qualify for relief from liability arising from community property law.[32]


B.  Married Filing Separately


If spouses file separate returns as married filing separately, each should report only their own income, exemptions, deductions, and credits on their individual return.[33] Each spouse is responsible for only their own taxes due on their own return- that is, no joint liability as with married filing jointly.[34] Each spouse can file a separate return even if only one of the spouses had income.[35] If spouses file separate returns and one spouse itemizes deductions, the other spouse cannot use the standard deduction and also should itemize deductions.[36]


Most often, filing jointly will provide the spouses with an increased refund or reduced tax bill.[37] When filing separately, the tax rate may be higher and the spouses typically will not be able to claim the earned income credit, the child and dependent care credit, and the adoption credit.[:38] Furthermore, if the spouses live in a community property state- such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin- they also may have to contend with community property allocations and adjustments, which result in added complexity and require additional tax preparation assistance.[39]

C.  Single


Filing as single is the standard filing status for unmarried people who do not qualify to file as head of household.[40) If a spouse was not married on the last day of the tax year and that spouse does not qualify to use any other filing status, then the spouse must file a tax return as single.[41)


D.   Head of Household


If a spouse is unmarried and qualified to file as head of household, that spouse will receive better tax benefits using head of household filing status than using single filing status.[42] A spouse also may be “considered unmarried” for head of household status if the spouses have lived apart for at least the last six months of the tax year and that spouse supports a qualifying relative.[43]


For 2018 through 2025, it also should be noted that the Tax Cuts and Jobs Act of 2017 (TCJA)[44] impacts single parents who itemize their deductions by eliminating the special tax brackets for single parents with custody of children filing as head of household as soon as taxable income exceeds $51,800 pursuant to new section 10)(2)(8).[45] For single parents filing as head of household who do not itemize, section 11021of the T.CJ.A amends section 63(c)(7) to provide head of household taxpayers with a standard deduction of $18,000 versus $12 ,000 for filing as single.[46]


  • A spouse may file as head of household if:


  1. The spouse is unmarried on the last day of the year[47] or “considered unmarried”- that is, there is a legally binding separation agreement, or the spouses have not lived together during the past six months of the tax year[48];
  2. The spouse’s home was the main home for a “qualifying person,” as defined below, for more than half the year[49];
  3. The spouse paid more than half the cost of maintaining the home for at least half the year[5O-] these costs include rent, mortgage interest, real estate taxes, insurance repairs, utilities, and food eaten in the home, but do not include clothes, education. medical, vacations, life insurance, or transportation[51]; and
  4. The spouse can claim the dependency exemptions for the qualifying persons[52]-even if the spouse does not actually claim the[53)


  • For purposes of the above listed requirements, a “qualifying person” is a “qualifying child” or “qualifying “[54] In general, a qualifying child[55] is defined as:
  1. A child (including legally adopted), stepchild, foster child, sibling, half -sibling, step- sibling, or a descendant of any of them-for example, a grandchild, niece or nephew[56];
  2. Who has the same residence as the taxpayer for more than half the year;
  3. Who has not provided over half of their own support for the year[57];
  4. Who is single or, if married, the spouse is qualified to claim them as a dependent- even if not actually claiming them[58]; and
  5. Who is under age 19, unless the child is a student[59] under age 24 as of the close of the calendar year-note, there are exceptions for disabled [6O)


  • Whereas, a qualifying relative[61]-often, a child that is too old to fit the definition of qualifying child-generally is defined as:
  1. A mother or father, if the spouse is qualified to claim them as a dependent – even if not actually claiming them [62]; or
  2. A relative related by blood, legal adoption, or marriage other than a parent-such as a child, sibling, grandparent, nephew, aunt, step-parent, or in-law- that lived with the spouse for more than half the year, and that the spouse is able to claim as a dependent­ even if not actually claiming them.[63]


Name Changes


It should be noted that a spouse who plans to reclaim a name that he or she had before marriage, such as a maiden name, should not use that name on a tax return until the name change has been filed with the Social Security Administration (SSA) using Form SS-5, Application for a Social Security Card.[64] The name on a tax return must match SSA records, and a mismatch can

significantly delay refunds and cause other unnecessary complications with the Service.[65]


Adapted with permission from Justin T. Miller, Making Divorce Less Taxing: A Unique Opportunity for Income, Estate and Gift Tax Planning, 52 Real. Prop. Tr. & Est. L.J., No. 1 (2017) and The New York State Society of Certified Public Accountants on-line tax publication, TaxStringer (February, 2021). The comments expressed in this article are the individual views of the author. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice. The reader should contact his/her tax and legal advisors prior to taking any action based upon disclosures made here.

Justin T.Miller, J.D., LL M., TEP, AEP1P, CFP1P, is a national wealth strategist at BNY Mellon, an adjunct professor at Golden Gate Univers;ty School of Law, and a Fellow of The American College of Trust and Estate Co



[1] For purposes of this Article, the terms divorce and marital dissolution are assumed to be synonymous, which is not always the case under the laws of certain states.

[2] Pun intended – less physically and mentally demanding as well as less money owed to the federal and state government

[3] See R.C. § 7703(a)(1). Any references to the “Code” or “I.R.c.” refer to the Internal Revenue Code, Title 26, United States Code; any reference to the Regulations refer s to the Regulations promulgated thereunder. All statutory citations in this Article refer to the current statute unless otherwise indicated.

[4] See id.

[5] For purposes of t his Article, both spouses are assumed to be living.

[6] See I.R.C. § 770 3(a)(1).

[7] See I.R.C. § 441(g).

[8] See R.C. § 770 3(a). Note that an interlocutory decree is not a final decree.

[9] Divorced or legally separated under a decree of divorce or a decree of separation. See R.C. § 152(e)(1)(A)(i).

[10] I.R.C. § 1 52(e)(1)(A)(ii.)

[11] See id.

[12] Unless otherwise provided, the names, characters, businesses, places, and events discussed in the hypothetical examples in this paper are fictitious. Any resemblance to actual persons, living or dead, or actual event s is purely coincidental.

[13] See Rev. Proc. 2018-18 , 2018-10 I.R.B. 392, 39 4.

[14] See infra Part 11.C.

[15] See I.R.C. § 6013(d)(3).

[16] See id.

[17] See id.

[18] I.R.C. §§ 1471-74 , 60 38 0

[19] See infra Part 11.B.

[20] See I.R.C. § 6015.

[21] See id.

[22 ] See id.

[2 3] See 1.R.S. FORM 8857, REQUEST FOR  INNOCENT SPOUSERELIEF, htt ps://ww / irs-pdf / f8857.pdf .

[24] See 1.R.C. § 6015(b).

[25] See id.

[26]See id.

[27] See

[28] See I.R.C. § 601S(c).

[29] See I.R.C. § 601 S(c}(3)(B).

[30] See I.R.C. § 6015(c)(e)(C); Culver v. Comm’ r, 116 T.C. 18 9, 1 96 – 98 (2001).

[31] See 1.R.C. § 6015 (f).

[32] See Treas. Reg. § 1.66-4. [33) See I.R.S. Pub. 501 (2016).

[33] See id.

[34] See id.

[35] See id.

(36) See id.

[37) See id.

(38] See id.

[39) See id.

(40) See id.

(41] See id.

(42) See id.

(43] 1.R.C.§  152{e)(1){A)(iii)               . Note that a spouse is considered to live in a home even if that spouse is temporarily absent due to special circumstances. See Treas. Reg.§ 1.2-2{c)(1)

(44] “Public law no. 115-97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018″ was originally introduced in Congress as the “Tax Cuts and Jobs Act.” The official name of the bill was changed prior to the final vote, however, it commonly referred to as the Tax Cuts and Jobs Act.

(45] See T.CJA § 11001(a) and I.R.C. §§ 10)(2)(8) and 10)(2){C).

[46] The Tax Policy Center of the Urban Institute and Brookings Institution estimates that the T.CJA will reduce the total number

(47] See I.R.C. § 2(b){1).

[48] Treas. Reg. § 1.2-2(b)(5).

(49) I.R.C. § 2(b)(1)(A)-(B). [50] See I.R.C. § 2{b)(1).

[51] See I.R.S. Pub. 501 (2016).

[52] See infra Part Ill.

[53] See 1.R.C. § 2(b)(1).

(54] I.R.C. § 152{a).

[55] I.R.C. § 1 52(c).

[56] See id.

[57] See id.

(58] See id.

[59] Defined under I.R.C. § 152(f)(2).

[60] See I.R.C. § 152(c).

[61] See 1.R.C. § 152(d) .

[62] See id.

(63] See id.

[64] See I.R.S. Pub . 17 (2016).

[65] See id.


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