Maine Divorce & Taxes

Divorce brings significant life changes, and understanding the tax implications is crucial for protecting your financial future. When you file for divorce in Maine, numerous tax considerations affect how you'll report income, claim deductions, divide assets, and plan for the years ahead. This comprehensive guide examines the key tax issues divorcing couples face and provides practical strategies for minimizing tax burdens during and after the divorce process.

How Your Filing Status Changes with Divorce

Your marital status on December 31st determines your tax filing status for the entire year. This seemingly simple rule creates important planning opportunities and potential pitfalls for divorcing couples in Maine.

If your divorce is final by December 31

You'll file as either Single or Head of Household (if you qualify as the custodial parent of at least one dependent child). You cannot file as Married Filing Jointly or Married Filing Separately, even if you were married for most of the year.

If your divorce is still pending on December 31

You must file as Married Filing Jointly or Married Filing Separately, regardless of how long you've been separated or how close you are to finalizing the divorce.

The Head of Household Exception

Maine follows federal tax rules that allow a special exception: you can file as Head of Household while still legally married if you meet specific requirements. To qualify, you must:

• Live apart from your spouse for at least the last six months of the year
• Pay more than half the cost of maintaining your home
• Have your home be the principal residence for a qualifying dependent for more than half the year
• Meet all other Head of Household requirements under IRS rules

Head of Household status offers significant advantages over filing Single, including lower tax rates and a higher standard deduction. For divorcing couples living separately, this filing status can provide substantial tax savings even before the divorce decree is finalized.

Tax Law Changes for Spousal Support

The Tax Cuts and Jobs Act of 2017 fundamentally changed how spousal support is treated for tax purposes, creating a critical distinction based on when your divorce was finalized.

Divorces Finalized Before January 1, 2019

For divorce decrees or separation agreements signed on or before December 31, 2018, the traditional spousal support tax treatment applies:

For the paying spouse

Spousal support payments are tax-deductible, reducing your taxable income dollar-for-dollar. This deduction can significantly lower your overall tax liability.

For the receiving spouse

Spousal support is taxable income that must be reported on your tax return. Because taxes aren't withheld automatically from support payments, you may need to make estimated tax payments or increase withholding from other income to avoid penalties.

Divorces Finalized After December 31, 2018

For divorce decrees or separation agreements signed after December 31, 2018, spousal support receives dramatically different tax treatment:

For the paying spouse

You cannot deduct spousal support payments on your tax return. The payments are made with after-tax dollars, providing no tax benefit.

For the receiving spouse

Spousal support is not taxable income. You don't report it on your tax return, and it doesn't increase your tax liability.

Modifications to Pre-2019 Agreements

If your divorce was finalized before 2019 but you modify your agreement after that date, the tax treatment may change. The new rules apply only if the modification:

• Changes the terms of spousal support payments, AND
• Explicitly states that spousal support payments are not deductible by the payer or includable in the recipient's income

Simply modifying other divorce terms without changing spousal support provisions preserves the old tax treatment.

Tax Treatment of Child Support

Unlike spousal support, child support has consistent tax treatment regardless of when your divorce was finalized:

Child support is never tax-deductible: The paying parent cannot deduct child support payments on their tax return, regardless of the amount paid.

Child support is never taxable income: The receiving parent doesn't report child support as income and owes no taxes on amounts received.

Allocation of Partial Payments

When the paying parent pays less than the full combined amount of child support and spousal support, the IRS requires a specific allocation: partial payments are first applied to child support, with any remainder considered spousal support. This allocation affects the tax treatment of the payment for both parties.

Claiming Children as Dependents After Divorce

Dependency exemptions create valuable tax benefits, and understanding who can claim children after divorce prevents conflicts and ensures you receive all credits to which you're entitled.

The Custodial Parent Presumption

The custodial parent—the parent with whom the child lived for more than half the year—has the right to claim the child as a dependent. This rule applies regardless of which parent provides more financial support or pays child support.

Releasing the Exemption

The custodial parent can release the exemption to the noncustodial parent by signing IRS Form 8332. This release can be for:

• A single year
• A specified number of years
• All future years until the child reaches age 18

The divorce decree may allocate dependency exemptions between parents, but the custodial parent must still complete Form 8332 for the noncustodial parent to claim the child. The decree alone doesn't satisfy IRS requirements.

Associated Tax Benefits

Even if the noncustodial parent claims the child as a dependent, certain tax benefits remain exclusively with the custodial parent. This creates situations where both parents receive some tax advantages related to the same child.

Tax Implications of Selling the Family Home

Real estate transactions during divorce carry significant tax consequences that can substantially impact both parties' financial outcomes.

Capital Gains Exclusion Rules

Under federal tax law, homeowners can exclude up to $250,000 of capital gain from the sale of their primary residence if they owned and lived in the home for at least two of the five years before the sale. Married couples filing jointly can exclude up to $500,000.

If you sell immediately pursuant to divorce

Each spouse can claim a $250,000 exclusion as long as both meet the residency requirement. This effectively preserves the $500,000 combined exclusion even though you're no longer married.

If one spouse keeps the home

The spouse retaining ownership must consider when to sell to maximize tax benefits. If you receive the home in the divorce but don't live in it (perhaps because your children live there with your ex-spouse), you may not meet the residency requirement when you eventually sell.

If you maintain joint ownership post-divorce

Each spouse remains entitled to the $250,000 exclusion upon eventual sale, even if only one satisfies the residency requirement. However, this arrangement keeps you legally and financially entangled with your ex-spouse, which may not serve your long-term interests.

Timing Considerations

The timing of your home sale relative to your divorce can create different tax outcomes. Selling before finalizing the divorce while filing jointly may allow the full $500,000 exclusion. Selling after divorce limits each spouse to $250,000. For homes with substantial appreciation, this timing difference could result in significant tax savings.

Property Division and Tax Consequences

Maine follows equitable distribution principles when dividing marital property, and while property transfers between spouses incident to divorce are generally tax-free, long-term tax implications vary significantly by asset type.

Tax-Free Transfers Under Current Law

Under federal tax law, property transfers between spouses during divorce typically occur without immediate tax consequences. This rule applies to:

• Real estate transfers
• Investment account transfers
• Retirement account divisions
• Business interest transfers
• Personal property transfers

The receiving spouse takes over the transferring spouse's tax basis in the property. This means that while you avoid taxes during the transfer itself, you may face capital gains taxes when you eventually sell the asset.

Retirement Account Divisions

Retirement accounts require special handling during divorce. A Qualified Domestic Relations Order (QRDO) allows you to divide retirement accounts without triggering immediate taxes or early withdrawal penalties. Without a proper QRDO, retirement account distributions during divorce can create unexpected tax bills.

Tax-deferred accounts (401(k), traditional IRA): Transfers pursuant to divorce avoid immediate taxation, but the receiving spouse will owe taxes when making withdrawals.

Roth accounts: Transfers remain tax-free both during the divorce and upon eventual withdrawal, making them more valuable than equivalent amounts in tax-deferred accounts.

State-Specific Maine Tax Considerations

While Maine generally follows federal tax law, some state-specific considerations affect divorcing couples.

Maine Income Tax Conformity

Maine conforms to the Internal Revenue Code for most tax provisions, meaning your Maine filing status generally matches your federal filing status. However, Maine maintains some differences that require careful attention:

• Maine still allowed personal exemptions in 2018 (federal exemptions were eliminated)
• Maine has different rules for certain credits and deductions
• Part-year residents must allocate income between Maine and other states

Part-Year Residency Issues

When one spouse moves out of Maine during the divorce, part-year residency rules create complexity. You must allocate income based on when you earned it and where you lived at the time. Maine-source income (wages earned in Maine, income from Maine property) remains taxable to Maine even after you move.

Tax Credits Available to Maine Residents

Two Maine-specific tax credits particularly affect divorcing couples: the Property Tax Fairness Credit and the Sales Tax Fairness Credit.

Property Tax Fairness Credit (PTFC)

This refundable credit helps Maine residents with property tax or rent burdens. Eligibility depends on:

• Maine residency for the full year
• Income below specified thresholds
• Property taxes or rent paid on your Maine residence

After divorce, household composition changes affect PTFC calculations. The custodial parent typically qualifies for a larger credit because household size directly influences the benefit amount. However, both former spouses may qualify for smaller credits if they meet residency and income requirements.

Sales Tax Fairness Credit (STFC)

The STFC provides relief for low-to-moderate income Maine residents. Like PTFC, this credit is calculated based on household size and income. Post-divorce changes in household composition typically increase the credit for custodial parents while decreasing it for noncustodial parents living alone.

Health Insurance and Tax Credits

Divorce creates a qualifying life event for health insurance purposes, affecting both coverage and tax credits.

Special Enrollment Period

Losing health insurance coverage due to divorce triggers a Special Enrollment Period, allowing you to obtain coverage through the Health Insurance Marketplace outside the standard open enrollment period. This ensures you maintain continuous coverage despite the life transition.

Premium Tax Credit Implications

If you receive advance payments of the Premium Tax Credit to help pay health insurance premiums purchased through the Marketplace, you must report changes in circumstances throughout the year, including:

• Changes in marital status
• Changes in household size
• Changes in income

Failing to report these changes can result in having to repay excess advance premium tax credits when you file your taxes, potentially creating an unexpected tax bill.

Name Changes and Tax Filing

If you change your name after divorce, promptly notify the Social Security Administration by filing Form SS-5. The name on your tax return must match Social Security Administration records, or the IRS will reject your return or delay your refund.

Order of operations for name changes:

1. Obtain legal name change through divorce decree or court order
2. Update Social Security records using Form SS-5
3. Wait for new Social Security card
4. Update driver's license and other identification
5. Use new name consistently on all tax documents

Estimated Tax Payments and Withholding

Divorce often dramatically changes your tax situation, requiring adjustments to estimated payments or withholding.

When to Adjust

Review your tax withholding and estimated payments if:

• You're receiving spousal support (for pre-2019 divorces where support is taxable)
• Your filing status changes from Married Filing Jointly to Single or Head of Household
• You lose dependency exemptions you previously claimed
• Your income changes due to property division or employment changes

Avoiding Underpayment Penalties

To avoid penalties for underpayment of estimated taxes, you must pay at least:

• 90% of the current year's tax liability, OR
• 100% of the previous year's tax liability (110% if your adjusted gross income exceeds certain thresholds)

Divorce-related changes can make meeting these safe harbors challenging, so proactive adjustment of withholding or estimated payments prevents surprise penalties.

Strategic Tax Planning During Divorce

Thoughtful tax planning during the divorce process can save thousands of dollars.

Timing Your Divorce Finalization

If your divorce is nearly final in late December, consider whether finalizing before or after December 31 creates better tax outcomes. Factors to consider:

• Comparative tax rates if filing jointly versus separately or single
• Availability of deductions or credits tied to filing status
• Spousal support tax treatment (if relevant for pre-2019 rules)
• Dependency exemption allocation

Allocating Deductions and Credits

When negotiating divorce terms, consider tax implications of various allocations:

• Who claims children as dependents and in which years
• How to allocate itemized deductions for the final joint return
• How to split tax refunds or liabilities from joint returns
• Whether to file jointly or separately for the final year

Working with Tax Professionals

Engaging a tax professional during the divorce process helps you:

• Understand tax implications of proposed settlement terms
• Model different scenarios to identify optimal outcomes
• Ensure proper reporting of all divorce-related transactions
• Avoid costly mistakes that are difficult or impossible to fix later

Certified Divorce Financial Analysts (CDFAs) specialize in the financial and tax aspects of divorce and can provide valuable guidance alongside your family law attorney.

Common Tax Mistakes to Avoid

Divorcing couples frequently make preventable tax errors:

Failing to obtain required forms: Not getting Form 8332 for dependency exemptions or proper QDROs for retirement accounts creates tax problems.

Ignoring embedded tax liabilities: Accepting property without considering its tax basis can leave you with unexpected future tax bills.

Missing name change notifications: Failing to update Social Security records causes tax filing problems.

Incorrectly allocating income: Part-year residents must carefully allocate income to avoid overpaying or underpaying state taxes.

Overlooking estimated payment requirements: Changes in income or filing status often require estimated payment adjustments to avoid penalties.

Documentation to Maintain

Proper documentation protects you during tax filing and potential audits:

Essential divorce-related tax documents:

• Final divorce decree with all amendments
• Separation agreements
• Child custody orders
• Form 8332 releases for dependency exemptions
• QDROs for retirement account divisions
• Property settlement records showing asset transfers
• Records of spousal support paid or received
• Records of child support paid or received

Maintain these documents for at least seven years after the tax year in which they're relevant, as IRS audit periods can extend this long in certain circumstances.

Moving Forward After Divorce

Once your divorce is finalized, establishing new tax routines helps you avoid ongoing complications:

Update your information:

• Change withholding on W-4 forms with employers
• Adjust estimated tax payments for self-employment income
• Update direct deposit information for tax refunds
• Change mailing addresses with tax authorities

Plan for future years:

• Understand your new filing status and its implications
• Calculate expected tax liability under your new circumstances
• Maximize available credits and deductions
• Consider long-term tax planning strategies for your changed situation

Maine-specific considerations add additional layers of complexity, particularly for part-year residents and those claiming state tax credits. Strategic planning around the timing of divorce finalization, allocation of deductions and credits, and proper documentation can generate significant tax savings.

Working with qualified tax professionals and family law attorneys who understand these intersecting issues helps you navigate the divorce process while minimizing tax burdens and positioning yourself for financial success in your post-divorce life. The tax consequences of decisions made during divorce often extend for years, making thoughtful planning during the process an essential investment in your financial future.