More Tax Tips for the Recently Divorced
5: Head of Household
Here's another break that doesn't necessarily go in favor of the custodial parent. The head-of-household filing status is a boon for those looking to increase their standard deduction and fit into a lower tax bracket. It's only available to unmarried people who have a qualifying child or dependent and who pay for more than half the cost of keeping up their home.
Even a noncustodial parent can file as a head of household, so long as that person meets those requirements. A qualifying child should live with you more than half the year, but you can get an exemption for that in a divorce agreement. Just know that getting the exemption doesn't mean you get out of the requirements; you still have to meet all the rules to file.
The tax rules for alimony are in stark contrast to those of child support. First off, alimony is deductible if you're paying it. And just like income, it's also taxable if you're receiving it. But beware: Don't think you can simply give a hefty check the first few years after a divorce and then wipe your hands clean. The IRS considers alimony that was given in large amounts for a short period of time after the divorce "property settlement funds," and those are not deductible.
One alternative to alimony and child support is family support, which is basically both checks rolled into one. Family support is treated like alimony, deductible to the payer and taxable to the payee.
3: Not All Property Is Alike
In the best case, you and your ex are amicable enough to come to a fair settlement of property. But even if your property is split fifty-fifty, that doesn't mean that your tax bill will be entirely equitable.
During a divorce, it's wise to know the tax implications of the property you're accepting or declining. Take the family home, for instance: While it might seem like a great deal to give it to your ex and make him or her deal with the costs associated, keep in mind that you can write off all the interest you're paying on a home mortgage. That tax break might be worth it to keep.
Just as tangible property might have positive or negative tax implications, assets like IRA and 401(k) accounts aren't all created equal. You need to make sure you know exactly what you're getting -- both now and in the future -- when you split assets that have strict tax rules.
Consider a Roth IRA, which you're funding with after-tax dollars, meaning that you'll declare contributions on a tax return. While that might sound unappealing for the short-term, keep in mind that the distributions -- that is, the money you can withdraw -- are entirely tax-free. On the other hand, a 401(k) will let you put money in tax-free, but you have to pay taxes when you withdraw. That means that a Roth IRA is going to be worth more than a non-Roth IRA or 401(k), even if they technically have the same amount of money in them [source: Thompson].
1: Communicate With Your Ex
OK, it's a little cheesy, but it might save you a heck of a lot of time, energy and anguish: If at all possible, communicate with your ex about your taxes. As we've seen, a lot of the tax issues arise when there's a misunderstanding about who gets to claim what, or confusion about the value of certain assets or deductions. An ounce of preventative discussion is worth a pound of IRS audits.
Dreading such a conversation? Hire someone to have it for you. While legal fees related to your split-up aren't generally deductible, you can itemize any advice you get about the tax implications of your separation or divorce. So if you'd really like to hammer out the details before they become a problem, hire a tax consultant or preparer to help you (and perhaps even your ex) understand the consequences of your settlement.
- Bischoff, Bill. "Who Gets the Child Tax Breaks After a Divorce?" The Wall Street Journal. March 31, 2012. (Oct. 8, 2014) http://online.wsj.com/news/articles/SB10001424052702303404704577305663291649228
- Bradford, Stacey. "Tax Tips for a New Divorce." CBS MoneyWatch. March 3, 2011. (Oct. 8, 2014) http://www.cbsnews.com/news/tax-tips-for-a-new-divorce/
- Connell, Kathleen B. "Preparing Your Taxes in the Year of Divorce." Huffington Post. May 21, 2013. (Oct. 8, 2014) http://www.huffingtonpost.com/kathleen-b-connell/preparing-your-taxes-in-t_b_2911023.html
- Guillen, Lina. "Child Support and Taxes." Nolo. 2014. (Oct. 8, 2014) http://www.nolo.com/legal-encyclopedia/child-support-taxes-30263.html
- Johnson, Laura. "Tax Tips for Non-Custodial Parents." SmartDivorce. 2014. (Oct. 8, 2014) http://www.smartdivorce.com/articles/taxtips.shtml
- Knight, Ray A. and Lee G. Knight. "Tax Considerations When Dividing Property in Divorce." Journal of Accountancy. April 2013. (Oct. 8, 2014) http://www.journalofaccountancy.com/Issues/2013/Apr/20126248.htm
- Ritchie, Josh. "The Tax Implications of Divorce." TurboTax. Sept. 2, 2010. (Nov. 8, 2014) http://blog.turbotax.intuit.com/2010/09/02/the-tax-implications-of-divorce/
- Thompson, Leslie. "Divorce? The 6 Worst Money Mistakes" MarketWatch. Sept. 23, 2014. (Nov. 8, 2014) http://www.marketwatch.com/story/divorce-the-6-worst-money-mistakes-2014-09-23?page=2
- TurboTax. "Do I Qualify for Head of Household?" Intuit. 2014. (Oct. 8, 2014) https://ttlc.intuit.com/questions/1894553-do-i-qualify-for-head-of-household
- Wall, Ginita. "10 Things You Need to Know About Divorce and Taxes." TurboTax. Nov. 9, 2010. (Oct. 8, 2014) http://blog.turbotax.intuit.com/2010/11/09/divorce-and-taxes/
- Young, Lauren. "4 Things to Know About Filing Your Taxes After Divorce." Huffington Post. April 10, 2014. (Oct. 8, 2014) http://www.huffingtonpost.com/2014/04/10/taxes-after-divorce_n_5127951.html
Many Americans don't think about their tax bills until the new year. But there are things you need to do before Dec. 31 if you want to pay less later.