How Does Divorce Affect Taxes in Texas?

• Can divorce impact your Texas tax status?
• Tax implications on alimony or spousal support
• Tax considerations for division of property
• Are there tax implications on child support?
• Taxes and retirement accounts
• References

Divorce changes your tax filing status in the year your divorce was finalized (with the notable exception being if you remarry that same year). In the past, alimony and spousal support had tax implications for both the payer and the receiver. Unless your divorce was finalized before 2019, this is no longer typically true. 

When it comes to the tax implications for divorce in Texas, one area where some parties can be blindsided is in their capital gains. If you sell your home during or in the wake of your divorce, you may have to pay capital gains taxes on that sale. However, there is a large exclusion you may qualify for.

Can divorce impact your Texas tax status?

Divorce will alter your tax status in the same year your divorce was finalized moving forward. If your divorce hasn’t been finalized by the end of that tax year, even if you’re in the process of getting divorced, you will still file as married (jointly or separately) for that year.

The default status of someone who has gotten a divorce is single, assuming they don’t qualify as a head of household and haven’t remarried by the end of that same year. It is typically more beneficial to file as a head of household if you can. It could lead to thousands of dollars in savings over filing as a single person.

 To qualify for head of household status, you must meet these criteria:

• Be unmarried
• Have a qualifying dependent
• Pay for greater than 50% of the costs of maintaining a home

Only one individual can file as the head of a given household each year.

Tax implications on alimony or spousal support

In the past, paying or receiving spousal support had tax implications. For example, mandated spousal support payments made to a spouse used to be tax-deductible by the payer. For the recipient, such payments qualified as taxable income. 

This system generally favored the payer, reducing their tax burden and increasing the receiver’s burden.

Eventually, the Tax Cuts and Jobs Act of 2017 (TCJA) was passed. This changed several elements of tax law, including the way spousal support is treated. A divorce or separation entered into after December 31, 2018, falls under these new rules, which generally favor the receiver of spousal support. 

An individual cannot claim a tax deduction resulting from spousal support payments they have made, and an individual who receives spousal support no longer must claim that as taxable income. 

Read: How 2017's Tax Bill Changed How Alimony Is Taxed

Tax considerations for division of property

In a divorce in Texas, marital (shared) property is split between the divorcing parties. This transfer doesn’t typically carry tax implications, even if it significantly changes your financial situation. 

However, the sale of property, with marital property commonly sold and the money split, can still qualify as receiving capital gains, which is taxable. This is typically relevant for divorcing parties who own large properties and decide to sell them, whether in Texas or elsewhere. 

So, if you get divorced in Texas and decide to sell your marital home and split the profits, you might have to pay capital gains tax on your profit.

Notably, there is a significant exclusion available for the sale of homes. For fully eligible parties, one can exclude the first $250,000 of gain from the sale of a home or $500,000 for a married couple filing jointly.

The rules around getting the maximum exception are relatively complicated, but the IRS has a helpful guide you can use to check your eligibility.

Are there tax implications on child support?

Child support payments don’t have tax implications. If you receive child support, it isn’t considered taxable income. Furthermore, paying child support is not tax-deductible.

The logic behind this is that child support payments represent a parent’s duty to support their child. The money received by the other parent goes directly toward supporting the child’s needs. 

While the idea of child support may share similarities to spousal support, child support has operated this way significantly longer than spousal support has. This is not a change that occurred as a result of the TCJA, and the year in which your divorce was finalized shouldn’t affect any tax implications in this area.

Taxes and retirement accounts

To understand how a Texas divorce can affect taxes and retirement accounts, it’s important to understand how the law typically views these accounts. Retirement accounts like 401Ks and IRAs are paid into regularly. When a person is single, the money going into these accounts is individual property. When a person is married, the pay going into these accounts is marital property. 

This means that, when you get a divorce, you are (typically) owed a portion of the payout from any retirement account that was paid into with marital property. This includes retirement accounts associated with your ex. In effect, the law views you as a partial owner of that account because marital property associated with you was paid into it.

In these cases, the specifics of how a divorce affects a retirement account and the taxable income you receive depend on the ratio of what individual and marital property of yours was paid into the account versus money from other sources. 

References