Divorce, property, and education planning
A tax professional can advise a taxpayer by:
- Assisting with the taxpayer’s tax issues involving divorce and separation
- During tax return preparation, navigate deductions and tax credits
- Helping taxpayers make informed tax decisions
The following material in this chapter reflects common, but not exclusive, situations that taxpayers often encounter and seek or need advice.
Divorce and separation
When a taxpayer is divorced or legally separated as of the last day of the tax year, they are generally considered single for filing purposes, even if they were married earlier in the year. However, if the taxpayer meets the requirements to claim a qualifying child and pays more than half the cost of maintaining a household, they may be eligible to file as head of household, which usually results in a lower tax rate and higher standard deduction than filing single. If the divorce or separation is not yet final and the couple is still legally married at the end of the year, they may file married filing jointly or married filing separately. Additional tax issues may include allocation of dependents, eligibility for certain credits, and the tax treatment of alimony or child support payments.
In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), property and income acquired during the marriage is generally owned equally by both spouses as community property, while property owned before the marriage and gifts or inheritances received by one spouse remain that spouse’s separate property; community property is generally divided equally upon divorce.
Example case: Maria and James finalized their divorce in October 2025. Since they were no longer married on December 31, 2025, each must file their own return for the 2025 tax year. Maria lived with her 8-year-old daughter all year, provided more than half the household support, and is entitled to claim her daughter as a dependent. This allows Maria to file as Head of household, giving her a higher standard deduction and better tax rates than if she filed as single. James, who lived alone after the divorce and did not provide more than half the cost of a home for a qualifying person, must file as single. Additionally, because their divorce decree states that James pays monthly child support, he cannot deduct those payments, and Maria does not report them as income.
If a taxpayer is separated from his/her spouse but still legally married on the last day of the tax year, he/she cannot use the “Single” filing status unless legally separated under a decree of divorce or separate maintenance. The choices are “Married filing jointly” or “Married filing separately” (MFS), unless the taxpayer is “considered unmarried” and can file as head of household. That takes all of the following: the taxpayer files a separate return, the spouse did not live in the home during the last six months of the year, the taxpayer paid more than half the cost of keeping up the home, the home was the main home of the taxpayer’s child, stepchild, or foster child for more than half the year, and the taxpayer can claim that child as a dependent (or could, except that the noncustodial parent claims the child under the rules for divorced or separated parents). Filing separately can be more complex and often results in a higher combined tax liability for the couple compared to filing jointly.
Only a married couple can file a joint return. Marital status is fixed on the last day of the year, and state law governs whether a couple is married. Partners who live together without marrying - including in a common law marriage that isn’t recognized in the state where they live or where it began, or in a registered domestic partnership or civil union - aren’t married for federal tax purposes, so each must file as single or, if they qualify, head of household.
Once a joint return is filed, the spouses can’t change to separate returns for that year after the due date of the return. The reverse is allowed: spouses who filed separately can generally amend to a joint return within 3 years of the original due date (not counting extensions).
Reporting obligations: information returns, barter, and cash
All income is reportable, including cash, whether or not the taxpayer receives a Form W-2 or Form 1099 for it. A taxpayer can also have reporting duties as a payer or a recipient:
- Forms 1099 the taxpayer files. Payments made in the course of a trade or business are reported to the payee and the IRS: $600 or more for services by a nonemployee on Form 1099-NEC (due by January 31), and rents of $600 or more or royalties of $10 or more on Form 1099-MISC. Wages paid to employees go on Form W-2 instead, and personal payments, such as paying a plumber to repair the taxpayer’s own home, aren’t reported.
- Bartering. The fair market value of goods or services received in exchange for the taxpayer’s own goods or services is income in the year received: on Schedule C if it’s part of the taxpayer’s business, otherwise on Schedule 1. A barter exchange (an organization whose members contract to trade with each other) reports its members’ transactions on Form 1099-B. An informal, noncommercial swap, such as a neighborhood babysitting cooperative, isn’t a barter exchange.
- Cash over $10,000 (Form 8300). A trade or business that receives more than $10,000 in cash in one transaction or in related transactions must file Form 8300 within 15 days and give the payer a written statement by January 31 of the following year. Payments by the same payer within 24 hours are related, and so are payments the business knows are connected, such as cash installments on one purchase that total more than $10,000 within a year. Cash means U.S. and foreign coins and currency; a cashier’s check, bank draft, traveler’s check, or money order with a face value of $10,000 or less also counts when received in a retail sale of a car or other consumer durable, a collectible, or travel or entertainment priced over $10,000. Personal checks and wire transfers don’t count. A person who isn’t in business, such as someone selling their own car for $11,000 in cash, doesn’t file Form 8300.
Sale of home tax reporting obligations
Sales of a taxpayer’s primary residence are generally reported to the IRS by the closing agent on Form 1099-S. A taxpayer who owned the home and used it as a main home for at least two of the five years before the sale can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) under IRC §121; gain above the exclusion is taxable.
A partial exclusion may be available under one of three IRS safe harbors - change in place of employment, health reasons, or unforeseen circumstances, which includes divorce or legal separation - even if the taxpayer sells before meeting the full two-year ownership and use test.
The exclusion applies only to the taxpayer’s main home (principal residence), not to a second or vacation home or to rental or investment property. The §121 exclusion can be used once every two years. Taxable gain is reported on Form 8949 and Schedule D; a sale whose gain is fully excludable does not need to be reported unless the taxpayer received Form 1099-S. Losses are not deductible on principal residences. A section 1031 exchange lets an investor defer gain on the sale of real property held for productive use in a trade or business or for investment by reinvesting the proceeds into similar, or “like-kind,” real property; personal-use property such as a primary residence never qualifies, and since the Tax Cuts and Jobs Act of 2017, personal property no longer qualifies either - for exchanges completed after December 31, 2017, §1031 applies only to real property. The replacement property must be identified within 45 days, and investors have up to 180 days (or the due date of the return, including extensions, if earlier) to complete the transaction. Cash, relief of debt, and property that is not like-kind may trigger taxable gain in the year of exchange. The exchange must be set up before the sale of the old property closes: an investor who actually or constructively receives the sale proceeds before receiving the replacement property has made a taxable sale, not an exchange, even if replacement property is bought later. In a deferred exchange, a qualified intermediary therefore normally holds the proceeds and acquires the replacement property under a written exchange agreement.
Education savings plans
Coverdell education savings account:
The Coverdell Education Savings Account is a trust or custodial account designed to help pay for qualified education expenses, including elementary, secondary, and higher education. Contributions are not tax-deductible, but earnings are tax-deferred, and distributions for qualified expenses are tax-free. Unused funds must be withdrawn by the beneficiary when he or she reaches age 30.
Section 529 plans
Internal Revenue Code §529 allows funds to be used for a wide range of education expenses, including college expenses at postsecondary schools nationwide, tuition for K-12 schools, certain apprenticeship costs, and student loan repayments. A taxpayer can enroll in any state’s 529 plan, but a taxpayer’s state’s plan may offer unique tax benefits for residents. Contributions aren’t deductible on the federal return. The individual 529 account beneficiary can be changed to an eligible family member to use for their qualified education expenses.
Withdrawals for qualified education expenses are free from federal income tax. The earnings portion of withdrawals that are not used for qualified education expenses is subject to federal income tax plus a 10% additional tax; the contributions come back tax-free. Contributions up to $19,000 annually are not subject to the federal gift tax. In a §529 plan, a taxpayer can combine up to five years’ worth of contributions, or $95,000.
Distributions from a Coverdell ESA or a §529 plan are reported to the recipient on Form 1099-Q. Form 1098-T is a different form: the school’s statement of tuition, used for the education credits.