Taxes and Divorce

Follow Us

Share!

Tax Considerations in Divorce

Do you suffer from tax information avoidance? Not many of us enjoy delving into the particulars of taxes, but this knowledge could be helpful to you if you are considering divorce. This article is not meant to take the place of tax advice, so please consult with a trusted CPA. We will discuss some areas that you will definitely want to be aware of as it relates to a pending divorce.

If you are like most people, you have left the tax decisions up to your spouse, just like a lot of us have left the general finances up to the other spouse. There are some advantages to knowing your financial and tax situation.

Tax Exemption for Minor Children

When a couple who have minor children divorce, they must decide who will take the IRS tax exemption for the children when they file their taxes in the future. This can be a significant deduction so don’t pass it up. If you are giving the exemption to your spouse to take, you will need to complete an IRS 8332 form giving permission for them to have the exemption instead of you. If you have more than one child, often times, couples agree for each parent to take one child and then alternate if there is an odd number or when there is only one child left. A good rule of thumb is to check with your accountant to see who benefits most from the exemption or deduction tax wise and give it to that person.

Deduction for Closing Costs on a New Home

If you purchased a new home after the divorce, you will be able to deduct certain costs that relate to the closing and the mortgage costs.

Deductions for Refinance Costs

Although you may deduct these costs, you cannot deduct them all in one year. Even though it may not seem like a large deduction, even a little bit over a long period of time is still an advantage to you.

Deductions for Mortgage Interest and Taxes

If you keep the marital home and continue to pay the mortgage and taxes, you will be able to deduct these expenses on your taxes.

Homestead Exemption

As a part of your Marriage Settlement Agreement you will determine if one of you will keep the marital home and providing it is your primary residence, you will also be eligible for the homestead exemption which will reduce your taxes and insurance.

Taxes and Penalties on IRA’s

If you need to cash in your IRA, or take some cash out, as a result of divorce, you can avoid the normal 10% penalty, because of the divorce, but you will still pay income tax. You must do this at the time of divorce, not afterwards. If you are simply transferring an existing account into your spouse’s name as a part of the equitable distribution of marital assets and liabilities, you, nor your spouse will pay any penalty or tax.

Divorcing and Remaining in the Marital Home Together

This is happening more due to the economy and real estate market. Your marital status on December 31st determines if you can file joint or must file single, so if you divorce and remain in the marital home together, you will have to decide how you will divvy up the deductions for the home forward going since your will have to file separately.

Filing Jointly or Filing Separately

If you are not divorced yet, but perhaps you are living separately and are wondering if you can file jointly, the answer is yes. Often it is to a couples’ advantage to file joint, and a good way to determine the benefit is to ask your accountant to prepare a phantom return (a what if scenario) to see what the advantages are to each of you. If you are working towards an amicable divorce, and it is advantageous for one of you, but not the other, one might pay the other the difference, and it is still meets both of your needs. Giving one of you the money you would have received if you filed on your own and eliminating taxes the other one would have paid to have to file separately is a win for everyone, except Uncle Sam.

Bankruptcy

Just a note for couples who are considering this. Often it is less expensive and less complicated to file as a couple for bankruptcy prior to the divorce. Please call if you have any questions about this.

Sorry, comments are closed for this post.

Custom WordPress Website created by Frank's Designs