Divorce and legal separation have significant tax consequences in California, particularly around the division of retirement accounts, real estate, spousal support, and the treatment of community property. Working with a tax professional alongside your family law attorney can help both parties understand the tax impact of settlement decisions before they are finalized.
How Divorce Affects Your Tax Filing Status
Your filing status for any given tax year is determined by your marital status on December 31 of that year. If your divorce is finalized before December 31, you are considered unmarried for the entire year. If it is not yet final, you may still have the option to file Married Filing Separately or, in some cases, Head of Household if you meet the IRS criteria.
Spousal Support and Tax Reporting
For divorces finalized on or after January 1, 2019, federal law no longer allows the paying spouse to deduct alimony and no longer requires the receiving spouse to report it as income. California did not conform to this federal change. As of current law, California still allows the alimony deduction for the payer and requires the recipient to include alimony as income on their California return. This creates a difference between federal and California returns that requires careful handling by a tax professional.
Dividing Retirement Accounts
Benefits from qualified retirement plans, such as most pension and profit-sharing plans, are divided using a Qualified Domestic Relations Order (QDRO). An IRA works differently: if you transfer all or part of your IRA to your spouse or former spouse under a divorce decree or a written instrument incident to the decree, that transfer isn’t considered a taxable transfer. A tax professional can explain the tax treatment of different account types and help ensure the transfer is structured correctly. QDROs are drafted by attorneys, but a CPA’s input on the tax implications can inform how the division is structured.
Community Property and Basis
California is a community property state. When assets are divided in a divorce, the tax basis of those assets carries significant implications, especially for real estate or investment accounts with large embedded gains. A CPA or tax attorney familiar with community property rules can help identify which assets carry the most favorable tax treatment.
Finding Tax Help During or After Divorce
Look for a CPA or EA who has experience with divorce-related tax matters and is willing to coordinate with your family law attorney. The California Board of Accountancy license lookup at dca.ca.gov/cba can confirm a CPA’s active status.
Official sources referenced: IRS.gov, California Board of Accountancy (dca.ca.gov/cba), California Franchise Tax Board (ftb.ca.gov). Not reviewed by a credentialed tax professional.