Getting a divorce is an emotional and physically-taxing experience. It can drain you of cheer, making it difficult to enjoy feelings of contentment or happiness. It can diminish your enthusiasm to spend time with friends and family. And for most people, divorce is especially difficult during the holidays, when it’s natural to spend time together.
Making matters worse, newly-divorced couples must contend with a number of tax-related issues when filing their returns. If you’re unaware of how to handle these issues, the consequences can be costly. In the following article, we’ll present 5 tax-related items divorcing couples need to keep in mind when going their separate ways. Neglecting to do so can result in missed deductions, penalties, and worse.
#1 – Are Your Children Actually “Dependents?”
The Internal Revenue Service allows you to declare your kids as dependents, assuming they meet a number of qualifying criteria. This provides a deduction that can help lower your tax bill at the end of each year. When it comes to divorce, however, the matter becomes more complex.
First, if either you or your ex-spouse have full custody of your children, that person gets to declare them as dependents. Unfortunately, the IRS has been slow to address creative custody arrangements. For example, suppose you and your ex-spouse share custody equally. Or, suppose you have your kids on the weekends and your spouse has them during the week. How does that affect your taxes?
It is advisable to seek advice from a trained accountant, and particularly one with experience in helping divorced couples. Otherwise, you might run afoul of one or more tax laws.
#2 – Dividing The Family Home
Most divorcing couples end up selling the family home and splitting the proceeds. Taxes need to be paid on a portion of the capital gains. The size of the taxable portion depends on the marital status of the owners.
If the sale of the property is completed while you are still married, the first $500,000 in capital gains is exempt from taxes. However, if the sale is completed following your divorce, the IRS only allows you to enjoy a tax-free profit on the first $250,000.
Whether or not this tax law affects you will depend largely on how much the value of your home has increased since the time you purchased it.
#3 – Child Support Payments And Taxes
Payments made for the purpose of child support are not affected by tax laws. The payments are considered to be a neutral item. If you are making child support payments to your ex-spouse, you are not allowed to deduct them from your taxable income. Conversely, if you are receiving child support payments, you do not need to declare them as taxable income.
#4 – Writing Off Spousal Support
Unlike child support, spousal support is a taxable event. If you are making alimony payments to your ex-spouse, you can deduct them from your taxable income. If you are receiving payments from your ex, you are required to declare them as taxable income. The payments are subject to the same tax rate as your wages.
Because of the way the IRS treats child support payments (tax-neutral) and spousal support payments (taxable), many paying ex-spouses prefer to pay more of the latter and less of the former. Both parties should keep this in mind when negotiating a divorce settlement agreement.
#5 – Timing Of Your Divorce
As far as the IRS is concerned, your return should reflect your filing status on the day your divorce was finalized. If you were still married on the last day of the tax year, you can file as a married couple. If you were officially married from January 1 through December 30, and your divorce became final on December 31, you are expected to file as an individual. There are tax benefits to filing as a married couple, which means the timing of your divorce is worth considering.
If you and your spouse have lived apart for the last six months or longer, you may be able to file as the head of household. Doing so requires that you have one or more kids, and at least one of them can be claimed as a dependent.
The 5 tax considerations above should not be taken lightly. Not only can they lead to enormous savings in the amount you pay the IRS each year, but mistakes can become expensive. Note that the above information should not be considered tax advice. If you are getting a divorce, consult an accountant who can help ensure that you fill out your return properly.