The Intersection of Divorce and Taxes: What to Know Before the April 15 Filing Deadline

Divorce brings no shortage of change, and tax season has a way of amplifying uncertainty when financial and legal transitions overlap. As the April 15 income tax filing deadline approaches, divorcing and recently divorced individuals should take time to review how their separation or divorce may affect their tax obligations.

Many of the most common issues arise not because taxes were ignored, but because tax consequences weren’t addressed early enough in the divorce process. 

Below are several key considerations to keep in mind. 

Spousal Maintenance: Federal and New York State Laws Don’t Speak the Same Language 

Under current federal law, spousal maintenance (also known as alimony) is treated differently than under New York State law. 

Federal tax law: 

• For divorce or separation agreements executed on or after January 1, 2019: 

• Spousal maintenance is not deductible by the paying spouse, and 

• Not taxable income to the recipient. 

New York State tax law: 

• New York did not adopt the federal changes. 

• For New York income tax purposes: 

• Spousal maintenance is generally deductible by the payor, and 

• Taxable income to the recipient. 

Why this matters: The same payment may be treated one way on a federal return and another way on a New York return. This difference can affect cash flow, tax estimates, and settlement negotiations—making coordination between legal and tax professionals especially important. 

Filing Status: Timing Is Everything 

A taxpayer’s filing status is determined by their marital status as of December 31 of the tax year. 

• If a divorce is not finalized by December 31, the parties are generally considered married for that year and may file jointly or separately. 

• If the divorce is finalized by December 31, each party must file as: 

• Single, or 

• Head of Household (if eligibility requirements are met). 

Filing status impacts tax rates, deductions, and credit eligibility. The timing of a divorce can have meaningful tax consequences. 

Children and Tax Benefits: Who Claims What? 

Divorce also affects how child-related tax benefits are allocated. 

Common issues include: 

• Who may claim the child as a dependent 

• Eligibility for the Child Tax Credit 

• Qualifications for the Head of Household filing status 

• Access to childcare-related tax credits 

Only one parent may claim a child as a dependent in a given tax year, and that designation often determines eligibility for these benefits. 

It’s also important to note that while divorce agreements may allocate tax benefits, the IRS requires compliance with tax laws and documentation. Court orders alone may not override certain IRS requirements. 

The Marital Residence: Income Taxes vs. Transfer Taxes  

The transfer of property between spouses incident to a divorce is generally not a taxable event. However, when a home is transferred or sold to a third party in connection with a divorce, the conveyance is a taxable event subject to capital gains (income tax). 

Capital Gains (Income Tax) 

• Federal and New York income tax rules generally allow homeowners to exclude up to: 

• $250,000 in capital gains for a single filer, or 

• $500,000 for married couples filing jointly, 

provided ownership and use requirements are met. 

After a divorce, eligibility for the larger exclusion may be affected by how ownership and occupancy are structured. 

State and Local Transfer Taxes 

While the transfer of property between spouses incident to a divorce is generally not a taxable event for the purposes of capital gains (income tax), the same is not true for the New York state and local transfer tax, which is a separate tax on the conveyance itself. 

• Taxable Value: NYS often presumes the consideration for the transfer is equal to the fair market value of the interest in the property being transferred. 

• Transfer Tax Rate: The state transfer tax in New York is 0.4%. In New York City, it is an additional 1% - 1.425%, depending on the value of the home.  

• Mansion Tax: If the transfer involves a residence with a value of $1 million or more, a 1% "mansion tax" may apply. 

• Who Pays: The responsibility for transfer taxes is often decided by the divorce settlement agreement. If the agreement is silent, the purchasing party is often left as the party responsible for the cost. 

Retirement and Investment Assets: Looking Beyond Face Value 

Dividing assets during a divorce often requires careful tax planning. While retirement accounts can be divided without immediate tax consequences, understanding the after-tax value of these assets is critical to achieving an equitable result. 

The after-tax value of a traditional IRA or 401K is not the same as the after-tax value of a Roth IRA or 401K. Likewise, the tax basis of different holdings in an investment portfolio will impact each investment’s after-tax value.  

These differences can be critical when negotiating the fair division of retirement and investment assets in your divorce agreement. 

A Collaborative Approach Makes a Difference 

Divorce-related tax issues are rarely straightforward—particularly when federal and state rules differ. As the April 15 filing deadline approaches, divorcing individuals should consider: 

• Filing status options 

• State and federal treatment of spousal maintenance 

• Allocation of child-related tax benefits 

• Timing and structure of real estate transactions 

• The tax impact of asset division 

These issues are best addressed through collaboration among legal counsel, tax advisors, and financial professionals. If you are navigating a divorce or supporting someone who is, thoughtful planning and coordination can help reduce uncertainty and avoid costly surprises later.