Tax Implications of Divorce in New York: What You Need to Know

The Tax Cuts and Jobs Act of 2017 changed the tax treatment of spousal maintenance for divorces finalized after December 31, 2018:

• The paying spouse can no longer deduct maintenance payments from their federal taxable income.
• The receiving spouse no longer includes maintenance in their federal taxable income.

This is a significant change. Before 2019, maintenance was deductible for the payor and taxable to the recipient. The new rules can affect negotiations — particularly the effective cost of maintenance for high-earning payors who previously received a deduction. New York State has its own tax rules, and the state treatment may differ from federal treatment; consult a tax professional.

Transfers of property between spouses as part of a divorce are generally not taxable events at the time of transfer under IRC § 1041. You do not pay capital gains tax when you transfer the house, investment accounts, or other assets to your spouse as part of the divorce.

However, the spouse who receives the property takes it at the original cost basis. If they later sell it, they will owe capital gains taxes based on that original basis — which may be significantly lower than the current value. This means an asset worth $200,000 on paper may have very different after-tax value depending on its basis. Always consider embedded tax liability when dividing assets.

When the marital home is sold as part of the divorce, each spouse may be able to exclude up to $250,000 in capital gains from federal income tax ($500,000 if filing jointly), provided they meet the ownership and use tests.

If one spouse keeps the home and later sells it, they may only be able to exclude $250,000 — not the joint $500,000. The timing of when you sell matters significantly.

Your tax filing status for a given year is determined by your marital status on December 31 of that year. If your divorce is finalized on December 30, you cannot file jointly for that year. This can have a significant impact on your tax liability, particularly regarding tax bracket and deduction eligibility.

If you are separated but not yet divorced, you may still be able to file jointly — or may prefer to file as "married filing separately." The choice depends on your financial situation; a tax professional can run the numbers.

The parent who has the child for more than half the year (the custodial parent) generally claims the child tax credit by default. However, this can be allocated differently by agreement or by signing IRS Form 8332, which transfers the right to claim the child to the non-custodial parent.

This is a negotiating point in divorce settlements. The child tax credit is worth up to $2,000 per child — real money that can be allocated thoughtfully.

Dividing retirement accounts via QDRO is not a taxable event at the time of transfer. However, if the receiving spouse takes a distribution rather than rolling the funds into their own retirement account, income taxes and potential penalties apply. Plan ahead to avoid unnecessary tax costs when dividing retirement assets.

The tax implications of your divorce settlement can rival the face value of the assets themselves. A divorce settlement that looks equal on paper may be very unequal after taxes. Involving a CPA or financial planner alongside your divorce attorney — especially in complex or high-asset divorces — is money well spent.

Weinrieb Law works closely with financial professionals to help clients understand the full financial picture of their divorce, including tax consequences, before any agreements are signed.