Divorce – Five Important Tax Tips
Divorce can be a sensitive topic and a difficult time for both parties. Whether you live in a common law or community property state, the process of filing taxes once the divorce has been finalized can be complicated. Deciding how assets are split, new filing status and even which spouse will claim the children as dependents are important considerations that go into the tax filing process.
#1 Which Taxpayer Will Claim The Children as a Dependent?
After 2009, a tax filer with shared custodial rights of a child must cede their claim for a tax exemption to the controlling ex-spouse by filing Form 8332. A custodial parent who is able to claim a child as a dependent is permitted a $3,900 deduction.
#2 What is Your Tax Filing Status?
A divorce will change your filing status from married filing jointly or separately to single, regardless of when the divorce was finalized during the year. Also if you want to file as head of household, you will have to had lived apart from your ex-spouse for at least six weeks and contribute more than half of the money to support the household.
#3 What is the Affect of Alimony?
Alimony may be necessary as a source of income for a divorcing spouse that has either stopped working, is returning to the workforce or is making significantly less than the other spouse. Alimony payments maybe considered taxable income to the recipient spouse.
#4 How Will You Divide Your Assets?
There are some tradeoffs that come when assets are divided, particularly a house. Gains that may have been subject to exemption as a result of a sale would be halved if the house is sold under a divorce decree. The spouse who receives the house as part of the divorce settlement will have the ability to claim the mortgage interest deduction.
#5 How Will Divorce Affect Your Retirement Savings?
Often a divorce results in the splitting up of retirement savings held by a working spouse, such as those held in an IRA or 401(k). Be sure to secure a qualified domestic relations order to secure treatment of these savings as your personal retirement savings and not those of your former spouse. Failure to do so could result in adverse tax treatment once these savings pass from one spouse to another.