Divorce and Taxes: 7 Costly Mistakes to Avoid
- Lisa McNally
- Jul 9
- 3 min read
Divorce is already overwhelming emotionally—but it also has serious financial consequences that can last for years, especially when it comes to taxes. Many people make critical tax mistakes during or after their divorce that result in unexpected bills, IRS audits, or lost savings.
At Optimal Divorce Solutions, I work with clients to anticipate and avoid these pitfalls by combining divorce coaching, financial analysis, and mediation expertise. In this post, I’ll share seven of the most common tax mistakes I see divorcing individuals make—and how you can steer clear of them.
1. Failing to Understand Your Filing Status
Know When You Can File Jointly or Separately
Your marital status on December 31 determines your tax filing status for the entire year. If you were legally married on that date, you can still file jointly. If your divorce is final by year-end, you must file as single or head of household (if eligible).
Common Pitfall: Divorcing couples often assume they must file separately during separation or mediation—but that’s not always the case. Filing jointly may result in a lower tax bill if both parties agree to cooperate.
2. Not Addressing Who Claims the Children
Clarify Custody and Tax Benefits in the Agreement
Only one parent can claim the child-related tax benefits each year, including:
Child Tax Credit
Head of Household status
Dependent Care Credit
Education credits (if applicable)
Even in 50/50 custody, the IRS requires one designated parent to claim these benefits.
Tip: The IRS default rule assigns this right to the parent with whom the child spent more than half the year—unless a written agreement or IRS Form 8332 specifies otherwise.
In mediation, I help parents negotiate fair, rotating, or income-based arrangements for claiming children.
3. Overlooking the Taxability of Alimony
Understand the New Rules Post-2019
If your divorce was finalized before January 1, 2019, alimony is likely tax-deductible for the payer and taxable income for the recipient.
If your divorce was finalized on or after January 1, 2019, alimony is no longer tax-deductible or taxable—for either party.
Mistake: Not calculating the after-tax impact of alimony can lead to unfair or unsustainable agreements. I run scenarios with my clients to ensure the agreed support amount meets real-life needs.
4. Ignoring Capital Gains When Dividing Real Estate
Your Home Is More Than Just Shelter—it’s a Tax Asset
If you sell your marital home as part of your divorce, you may be eligible for a capital gains exclusion of up to $250,000 per person ($500,000 jointly). But that’s only if:
You lived in the home for two of the last five years
You haven’t excluded gains from another home sale in the past two years
Risk: If one spouse keeps the home and sells later, they may lose the full exclusion and owe capital gains tax.
5. Failing to Properly Divide Retirement Accounts
Use a QDRO to Avoid Penalties
Qualified retirement accounts (like 401(k)s or pensions) require a Qualified Domestic Relations Order (QDRO) to divide assets without triggering taxes or penalties.
Without a QDRO:
Distributions may be taxed as income
You may owe a 10% early withdrawal penalty if under age 59½
Mistake: Assuming a divorce decree is enough—when the IRS requires separate paperwork to protect your interests.
6. Not Planning for Tax Withholding Changes
Your New Financial Picture = New Tax Strategy
Divorce often means a significant shift in income, filing status, and deductions. If you don’t update your:
W-4 withholding
Estimated tax payments
You could be hit with an unexpected tax bill or underpayment penalties the following year.
7. Forgetting About Tax Losses or Carryovers
Maximize the Value of Tax Attributes
If you and your spouse have:
Capital loss carryovers
Charitable contribution carryovers
Business losses
Be sure to divide or allocate them clearly in your settlement.
Mistake: Letting these tax-saving opportunities disappear due to lack of awareness.
Key Takeaways:
Your filing status depends on your marital status as of December 31
Only one parent can claim each child for tax purposes
Alimony tax rules depend on your divorce date
Real estate decisions can trigger or avoid capital gains tax
Retirement accounts need a QDRO to divide without penalties
Update your tax withholding and payments post-divorce
Don’t overlook carryovers like capital losses or deductions
Divorce doesn’t have to come with a surprise tax bill. With the right support, you can make informed decisions that protect your finances now and in the future.
Schedule your free 30-minute consultation today and let’s build a divorce strategy that keeps taxes—and stress—in check.
Lisa McNally
Certified Divorce Coach | Certified Divorce Mediator
Certified Divorce Financial Analyst (CDFA®) | Certified Divorce Real Estate Expert (CDRE)
Licensed Real Estate Broker (NH & ME)
Founder, Optimal Divorce Solutions
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