If you’re getting a divorce, you could be heading into financial jeopardy. Consider the four tax tips outlined below. Depending on your situation, they might save you big bucks down the road.
1. Filing status matters.
No matter what month you become legally divorced, the IRS will generally consider you as being unmarried for the entire year. In other words, your marital status as of December 31 controls your filing status for that entire year. This can be bad news, especially if one spouse earns substantially more income than the other. Once you lose the joint return option, your tax bracket will likely shift and you will not be able to claim the same kind of deductions as someone who is married. Conversely, for couples whose incomes are relatively even, filing jointly can
present it’s own problems. Your tax rate will be calculated based on the amount of your combined income, raising your tax bill. This is sometimes called the “marriage penalty”.The IRS suggests having your accountant figure your taxes both ways to see which route will work best for your situation.
2. Understand how alimony and child support payments can affect your tax situation.
Alimony payments required by the divorce decree are tax-deductible. Further, the recipient of alimony payments is required to declare those payments as part of their income and are taxable. However, child support payments are not tax-deductible and the spouse receiving those payments will not have to pay taxes on them. Keep this rule in your hip pocket as a bargaining chip in the divorce proceedings.
3. Retain write-offs for life insurance.
If you continue to pay the premiums on an ex-spouse’s life insurance policy, you can deduct the cost only if your spouse owns the policy and is the irrevocable beneficiary. (Children may be named as contingent beneficiaries). If you currently own the policy, consider transferring ownership to your ex-spouse t take advantage of this write-off.
4. Noncustodial parents can claim children as dependents, but only in certain circumstances.
The general rule is that the parent with custody of children for most of the year (the so-called-custodial parent) is entitled to the dependency exemptions and certain other child-related tax breaks. There is an exception though. If the custodial parent signs a formal waiver, the noncustodial parent can claim the exemptions and certain other child-related tax breaks.
- This article was a contribution from the Business Management Daily Publication.
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