Divorce and taxes: If you’re in the process of your divorce, make sure you keep in mind the tax implications of your transactions. They can have a tremendous impact on the amount you are able to keep when the final accounting is done.
Divorce and Taxes Issues:
1. Filing status
What’s the most advantageous filing status for you? Our divorce and taxes articles will explore this topic. Generally, it is best to file a joint return with your spouse while your divorce is pending. But your marital status as of December 31 of each year controls your filing status for that entire year. We will explore this vitally important topic in the articles.
2. Exemptions for dependents
Under federal law, you can claim your child as a dependent on your tax return your child lived with you the majority of the tax year. You can agree to allow your spouse to take the exemption for a dependent child if the you sign a statement allowing your spouse to claim the exemption.
3. Home sales
You may be able to avoid all capital gains on the sale of your residence in your divorce. You will be allowed to avoid tax on the first $250,000 of gain on the sale of your primary home if you have owned the home and lived there at least two years out of the last five. Married couples filing jointly can exclude up to $500,000 as long as either one has owned the residence, and both used it as a primary home for at least two out of the last five years. Take a look at our article about the sale of your home.
4. Payments to your spouse
As we discuss in our other articles, subject to certain conditions, if you’re paying spousal support, you can take a tax deduction for the payments. If you receive spousal support, you must pay tax on that amount.
In the case of child support, neither side can claim a deduction nor does anyone have to pay taxes on the amount paid.
5. Transfer of retirement assets
The basic rule is that a “rollover” to your spouse of your 401(k) is tax free, but handing them a check will have potentially enormous tax implications. Be careful how you handle it. Read more about how to transfer your retirement plans.
6. Medical expenses
Generally, whoever actually pays the child’s medical bills after the divorce can claim the deduction. It doesn’t matter who has custody of the child and claims the dependency exemption.
7. Asset transfers
There is no tax due when any property given to your spouse, as part of your divorce, is transferred. The current basis in the asset will transfer to the receiving spouse as well. Read about transferring assets in your divorce.
8. Tax credits
If you’re the parent who claims the dependent exemption, you’re also the one who can claim the child credit (up to $1,000) and the American Opportunity higher education credit (up to $2,500) or the Lifetime Learning higher education tax credit (up to $2,000).
Be sure to read our articles and watch our videos to make smart decisions in your individual case.