If you are going through a divorce, taxes might be the last thing on your mind, and rightly so. But tax season is upon us and your divorce could affect how you file your taxes. As we head into this year’s tax season, here are some things to consider:
- Filing Status. Will you file married filing joint (lower tax rate) or file married filing separate (higher tax rate and less tax benefits)?
- Who Will Claim the Children’s Exemption? If you are the custodial parent and you support the child more than half the year than you are entitled to take their exemption, but it is possible for the non-custodial parent to claim the exemption as long as the custodial parent signs a waiver pledging that he or she won’t claim it.
- Medical Expenses. Even if your spouse claims the child, you can continue to claim the medical expenses for that child(ren).
- Tax Credits. If you claim the dependency exemption, then you also claim the child tax credit and any education credit. If you don’t claim the exemption, then you can’t claim these credits.
- Alimony vs Child Support. Don’t mix these up. Child support is not taxable to the one receiving it or is it deductible to the one paying it. Alimony, on the other hand, is taxable to the one receiving it and is deductible to the one paying it.
- Funding an IRA. If you are getting alimony, you could consider funding an IRA, because alimony is considered “earned income”.
- Asset Transfers. When going through a divorce, the parties’ assets are divided. When this happens, the property’s tax basis shifts as well. For example: Your spouse has to give you $100,000 worth of stock, at that time the basis for that stock is $50,000 because that is what your spouse paid for it. If you sell it at that time, you will have a capital gain of $50,000. If you sell it 10 years later and the value has gone up to $200,000, then your taxable capital gain would be $150,000.
- Home Sale. If you and your spouse decide to sell your home, you could have capital gain on the home that you have to pay taxes on. There is an exclusion for the primary resident as long as it was lived in by you two out of the last five years. If the two-year minimum was not met, then you will have to split the gain.
- Transfer of Retirement. If you receive any 401K money in your settlement, you have the option to roll it over into your own 401K and there will be no tax implications. However, if you take out all the money, then you will have to pay taxes on the withdraw plus 10% penalty.
- Change Withholding. If you are employed, you will need to change your withholding otherwise you may owe taxes at the end of the year.
Filing taxes after a divorce can be confusing and tricky. It’s important to speak with a tax professional such as an enrolled agent to discuss your options for filing your taxes when going through a separation/divorce to ensure you maximize your benefits for you tax returns.
Elite Tax & Financial Services