Divorce and Taxes: 5 Smart Moves to Make Before December 31st

By Judd Allen, CDFA® Candidate

Divorce doesn’t just end a relationship. It reshapes your financial life. And when it comes to taxes, what worked in the past might not apply anymore.

The end of the year is one of the most important windows for making smart financial moves. That’s especially true for people going through a divorce or adjusting to life after one. Waiting until tax season to figure it all out can lead to avoidable mistakes and missed opportunities.

These five practical actions can help you step into the new year with more clarity, confidence, and control.

Know Your Filing Status

Your marital status on December 31st determines your IRS filing status for the year. If your divorce is finalized by that date, you’ll file as single or possibly head of household. If the divorce is still pending, you’re still considered married and must file either jointly or separately.

Head of household can be more favorable than single status. It offers a higher standard deduction and more generous tax brackets. To qualify, you must have paid more than half the cost of maintaining your home and have had a qualifying dependent living with you for more than half the year.

Married filing separately may be the right choice if you don’t trust how your spouse is reporting income or deductions. It could also protect you from future IRS issues if there’s a dispute.

If you're unsure, don’t guess. Confirm your divorce date with your attorney, then speak with a CPA about which filing status best reflects your situation.

Understand How Support Payments Affect Your Taxes

There’s a lot of confusion about how alimony and child support are taxed. The answer depends on when your divorce agreement was finalized.

For divorces finalized on or after January 1, 2019, alimony is not tax-deductible for the person paying it and not considered income for the person receiving it. If your agreement was finalized before that date and hasn't been modified, the old rules may still apply. That means alimony might still be deductible or taxable depending on your agreement.

Child support hasn’t changed. It’s not deductible by the payer and not taxable for the recipient.

If you're paying or receiving support, you’ll want to know how it impacts your actual income picture. It affects tax planning, budgeting, and estimated tax payments. This is one area where small misunderstandings can create big problems.

Max Out Retirement Contributions While You Can

Divorce often puts long-term savings on pause. Maybe accounts were divided. Maybe cash flow shifted. The end of the year is your last chance to catch up and start rebuilding.

If you have access to a 401(k), the 2025 contribution limit is $23,500. If you're age 50 or older, you can make a $7,500 catch-up contribution, bringing your total to $31,000. Contributions to a traditional 401(k) reduce your taxable income, which could lower your tax bill.

If you're self-employed, you have even more flexibility. A SEP IRA allows contributions up to 25% of your compensation, capped at $70,000 for 2025. A Solo 401(k) lets you contribute both as employee and employer, making it easier to save aggressively when income allows.

These tools aren’t just about tax savings. They’re about regaining control and rebuilding momentum for your future. Don’t let this year pass without at least reviewing your options.

Coordinate Dependent Claims

One of the most common tax issues after divorce is confusion over who claims the children. If both parents claim the same child in the same tax year, the IRS will flag both returns, and someone will need to file an amendment.

Your divorce agreement should specify who claims each child. Some parents alternate years. Others divide children between them. If needed, one parent can use IRS Form 8332 to waive their claim and allow the other parent to take the tax benefits.

These tax benefits might include the Child Tax Credit, Dependent Care Credit, and other education-related deductions. They can make a real difference in your refund or overall tax liability.

Confirm plans with your co-parent ahead of time, even if it’s already in writing. Clear communication prevents delays, stress, and potential penalties.

Offset Gains by Harvesting Losses

Divorce often involves selling assets like homes, investment properties, or business interests. Those transactions can trigger capital gains, which means higher taxes unless you plan ahead.

If you have investments that have dropped in value, consider selling them before year-end to lock in a capital loss. This strategy, known as tax-loss harvesting, can offset your gains and reduce your taxable income.

You can also use up to $3,000 of net losses to reduce your ordinary income. If you have more losses than gains, you can carry them forward to future years.

Just be careful not to trigger the wash sale rule. If you sell an investment at a loss and buy the same or substantially identical security within 30 days, the IRS won’t let you claim the loss.

Also, make sure you understand the cost basis of any investment assets received in the divorce. Selling without knowing the original value could result in more taxes than expected.

Don’t Wait Until It’s Too Late

Most people don’t want to think about taxes during the holidays. After divorce, it’s even easier to put it off. The emotional toll is real. Still, waiting until April to deal with these things can hurt more than help.

You don’t need to overhaul your financial life by December 31st. You just need to take a few clear steps to protect your money and your peace of mind.

Start with a call to your CPA or financial advisor. Ask what still needs to happen before year-end. Review your retirement contributions. Double-check your filing status. Get clarity on dependent claims. Address one thing at a time.

Divorce has already brought enough surprises. Your taxes shouldn’t be one of them.