Accounting for divorce at tax time
Next to the death of a loved one, going through a divorce may be the hardest trial anybody faces. Besides the emotional turmoil, it can also leave you financially devastated. Don’t make it any harder by forgetting the IRS. Being informed and handling your taxes wisely following a marital dissolution can help keep a difficult financial situation from becoming a devastating one.
Married or single?
You filed for divorce in November. It won’t be final until February. Since you filed and have not lived with your spouse for two months, can’t you use “single” for your filing status?
The answer is no. The IRS will consider you married unless the divorce was finalized before the end of the year.
But if you have dependent children, you may be able to file as “head of household” and receive more favorable deductions under certain circumstance. First, you have to have been living apart from your spouse for half of the year, and paying for your own housing expenses. Also, the dependent child has to have been living with you for at least six months.
Claiming the kids
Only one parent can claim an exemption for a child on their tax return. Generally, that comes down to whichever parent the child lived with for the greater part of the year. Or a degree can be signed by both parents, giving the exemption to one or the other. The tax difference can be significant. Every qualifying child exemption reduces your taxable income by $3,700.
Property transfers must be made within a year of the date the divorce is finalized to avoid tax consequences. Neither of the former spouses can experience capital gains or losses as a result of such a transfer. However, should property acquired through divorce be sold at a later date, the spouse who sold it will be responsible for taxes on any gains.
Tax lawyer Robert Woods says:
“The notion that something is a tax-free transfer doesn’t mean that you don’t have to plan for taxes in the future.”
Alimony can be deducted from the taxable income of the parent who pays it. Conversely, the ex-spouse receiving the alimony counts it as income that is taxed at the end of the year.
As straight-forward as that sounds, many confuse it with a property settlement, and vice-versa, according to a posting on the Legal Broadcast Network:
“There are numerous IRS audits on both sides of a divorce finding that someone who is receiving alimony thinks it should be a property settlement and not income. And someone who is paying property settlement thinks it’s like alimony and should be able to deduct it.”
Supporting your child
The parent paying child support is not allowed to deduct it from their taxable income. Likewise, the parent receiving the support is not obligated to count it as taxable income. The concern is for the child, and not who can get an advantage.
The modern tax code is incredibly complex, and handling things properly can save you a bundle in tax liability following a divorce. The bottom line, as always, if unsure, is to seek out a reputable professional to help.