Navigating a divorce is complex, and the financial transition requires careful tax planning and careful year end tax planning. Divorce tax planning is different than “regular” tax planning. Missing documents, crucial deadlines, or choosing the wrong filing status could drastically increase your tax liability.
If you’re navigating a divorce and managing your taxes for the first time, here are 8 year end tax planning moves to keep you ahead of the game:
1. Confirm your filing status
If your divorce was final by December 31 of last year, you have two options:
- Single
- Head of Household (if you qualify)
If the divorce is not final by December 31, then you will potentially have the choice of three filing status’:
- Married filing joint
- Married filing separate
- Head of household, even if the divorce is not final.
Head of household has certain requirements that need to be met in order to claim this filing status before the divorce is final, for instance, you and your spouse need to have lived in separate physical residences for the last six months of the tax year.
Please also remember that married filing separate (MFS) has some complicated nuances that can significantly increase your tax liability. For example, the two returns have to mirror one another when it comes to taking the standard deduction or itemized deductions (both have to itemize or take the standard deduction). Another example is you cannot take the dependent care credit when filing MFS.
2. Confirm which dependents you are able to claim
Having the wrong dependent is a major cause for a return to be rejected both by the IRS and the State tax authorities. It may also cause delays and stress in the filing process. While it is easy to correct, it is also easy to avoid having to go through the rejection and correction processes. You may also want to consider getting Form 8332 signed by your spouse, as this is a legal mechanism that confirms who can claim the child.
3. Update your W-4 and withholdings
This is crucial to avoiding an expensive surprise when filing your taxes and can be done as soon as one party files for divorce. A change in marital status or household expense support can change your tax liability; adjust your set up in payroll and withholding accordingly. It is also easier to pay taxes in smaller increments through your payroll than to have to come up with a larger amount when filing.
4. Max out retirement plan contributions
For example, contribute to your 401(k) or traditional IRA. For certain income levels, you may be eligible to contribute to an employer’s retirement plan as well as contribute to an IRA. If a Roth makes more sense as your vehicle to save for retirement, then you may not reduce your current tax liability, however, you can save significantly on your taxes during retirement. This is sound advice for everyone, not just those going through a divorce.
5. Harvest investment losses
One way to effectively reduce your taxes (specifically your capital gains tax) is to see if you have any potential investment losses. These capital losses can offset your capital gains realized on other investments. Should you have capital losses that exceed your capital gains, you are also allowed to deduct up to $3,000 of ordinary income if you file joint (if applicable). For divorcing couples, deciding on who will claim these capital losses going forward is an often overlooked tax benefit.
6. Review property transfers in your settlement
Transfers between spouses or incident to divorce generally won’t trigger immediate tax under current tax law, but the cost basis (basically the purchase price plus some improvement costs) is critical for a future sale. It is very important to know what the cost basis is in order to reduce the amount of gains you will have to pay taxes on.
7. Charitable giving and contributions
Have you included in your settlement agreement how the charitable donations made so far this year will be split between the parties? For 2025, charitable deductions are deductible only if you itemize. Starting in 2026, taxpayers who do not itemize will be permitted to deduct $2,000 in charitable donations for Married Filing Jointly and $1,000 for single filers.
8. Keep documentation and meet deadlines
Maintain records of all relevant transactions. For transactions occurring through the year, they will need to be recorded on that year’s transaction (e.g. eligible business expenses, certain health care premiums, charitable deductions etc.). Accurate documentation is critical to future transactions as well and minimizing future tax liabilities (e.g. refer to the “Review property transfers in your settlement” section.
It can be very helpful, not to mention tax savvy, to do a tax review later in the year – around October or early November. This will help you understand how your new situation will impact your taxes and to “catch up” on any taxes your may owe by December 31.
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