Indiana Divorce and Taxes: What You Need to Know Before Filing
Filing for divorce is already one of the most stressful experiences a person can go through. Adding tax implications to the mix can feel overwhelming. But understanding how divorce affects your taxes in Indiana can save you from costly surprises down the road. Here is what you need to know before you file.
How Your Filing Status Changes
Your tax filing status for the entire year is determined by your marital status on December 31. If your divorce is finalized before December 31, you will file as single (or head of household if you have a qualifying child) for that entire tax year. If your divorce is not final by December 31, you are still considered married for tax purposes and must file either jointly or separately.
Filing jointly typically results in a lower tax bill for most couples. Once divorced, both of you lose that option. Some people choose to time their divorce finalization with tax planning in mind.
Property Transfers Between Spouses
In most cases, transferring property between spouses as part of a divorce settlement is not a taxable event at the time of transfer. The IRS generally treats these transfers as non-recognition events. However, taxes can come into play later.
If you receive the family home in the divorce and later sell it, you may owe capital gains taxes depending on how much the home has appreciated. The key factor is your cost basis, which is what was originally paid for the property. A family law attorney and a tax professional should both be involved when dividing significant assets.
**Common property transfer considerations:**
- Retirement accounts such as 401(k)s and IRAs require a Qualified Domestic Relations Order (QDRO) to transfer without triggering taxes or penalties
- Brokerage accounts transferred in divorce carry over the original cost basis
- The spouse who keeps the home takes on the tax responsibility when it is eventually sold
Spousal Maintenance and Taxes
Indiana courts may award spousal maintenance in certain circumstances. Under current federal tax law (post-2018 divorce agreements), spousal maintenance payments are no longer deductible by the paying spouse and are not considered taxable income for the receiving spouse. This is a significant change from prior law and affects how both parties should approach negotiations.
If your divorce agreement was finalized before January 1, 2019, the old rules may still apply. Talk to a tax professional about which rules govern your situation.
Child-Related Tax Benefits
Divorced parents often have questions about who gets to claim the child tax credit, the dependent exemption, and other child-related tax benefits. In general, the custodial parent (the one the child lives with for more nights during the year) has the right to claim the child as a dependent.
However, the custodial parent can sign Form 8332 to release the claim to the non-custodial parent for a given tax year. This is sometimes negotiated as part of the divorce settlement. Make sure your divorce agreement is clear about who claims the children each year to avoid conflicts with the IRS.
**Child-related tax items that come up in Indiana divorces:**
- Child tax credit
- Earned income tax credit (custodial parent only — cannot be transferred)
- Child and dependent care credit
- Education credits
Retirement Accounts: Handle With Care
Dividing retirement accounts incorrectly can trigger taxes and early withdrawal penalties. A QDRO is required for most employer-sponsored retirement plans such as 401(k)s and pensions. Without a properly drafted QDRO, any distribution may be treated as a taxable withdrawal.
IRAs are divided differently and do not require a QDRO, but the transfer must be done as a direct trustee-to-trustee rollover to avoid taxes.
FAQ
Does Indiana have any state-specific tax rules for divorcing couples?
Indiana follows federal guidance on most divorce-related tax matters. However, Indiana does have its own income tax, and changes to your filing status will affect your state return as well. It is a good idea to work with a tax professional familiar with Indiana state taxes during your divorce.
Can I deduct attorney fees I paid during my divorce?
In most cases, no. Personal legal fees for divorce proceedings are not deductible under current tax law. An exception may apply if a portion of your attorney fees were specifically for obtaining taxable alimony or for tax advice, but this is a narrow exception. Consult a tax advisor.
What happens if my ex and I disagree about who claims the kids on taxes?
If both parents claim the same child, the IRS will flag both returns. The IRS tie-breaking rules generally favor the custodial parent. If your divorce decree or separation agreement addresses this, you should follow that agreement. If it does not, you may need to go back to court to clarify.
Should I file jointly with my spouse during the divorce process?
It depends on your situation. Filing jointly can lower your tax bill, but it also means you are both jointly responsible for any taxes, penalties, or errors on that return. If you have concerns about your spouse's financial honesty, filing separately may be the safer choice even if it costs more in taxes.
Talk to an Attorney About Your Divorce
Tax issues in divorce are real and can have long-term financial consequences. At Ciyou & Associates, P.C., our attorneys understand the financial complexity of Indiana divorce cases and work with our clients to protect their interests. If you have questions about divorce in Indiana, we are here to help.
Call us at [(317) 342-4275](tel:3173424275) or visit [ciyoulaw.com](https://ciyoulaw.com) to schedule a consultation.
*This article is for informational purposes only and does not constitute legal advice.*
Citations
- IRS Publication 504: Divorced or Separated Individuals — https://www.irs.gov/publications/p504
- IRS Form 8332: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent — https://www.irs.gov/forms-pubs/about-form-8332
- Indiana Department of Revenue: Individual Income Tax — https://www.in.gov/dor/individual-income-taxes/
- Tax Cuts and Jobs Act (2017) — alimony deduction changes effective for agreements after December 31, 2018
