Divorce and Taxes: What You Need To Know

There are so many financial implications to divorce including tax obligations. Work with expert divorce attorneys and financial professionals to plan ahead and make thoughtful choices about your money.

by Ginita Wall, CPA, CFP®, CDFA™

Ginita Wall Divorce Financial advice San Diego 858-472-4022

Ginita Wall

 

Divorce is difficult enough. What could add to the anxiety that divorce brings? Taxes. If you are one of the many people who recently divorced, this year, as a result you will be

coping with new tax issues, and may even be filing your own tax return for the first time. Here are ten tips to help you handle tax issues now that you are divorced.

  1. Determine your filing status. Your marital status at the end of the year determines how you file your tax return. If you were divorced by midnight on December 31 of the tax year, you will file separately from your former spouse. If you are the custodial parent for your children, you may qualify for the favorable head of household status. If not, then you will file as a single taxpayer, even if you were married for part of the tax year. If you aren’t sure what would be better, you can ask your tax professional to project your taxes both ways to see.
  2. Consider the tax implications of support. Child support is not deductible to the person who pays it, but alimony is. Likewise, the recipient of alimony must claim it on her tax return, but child support isn’t reported as income. If you rolled your support together into “family support” in your agreement, that makes it fully taxable to the recipient and deductible to the payer, just like alimony. That often saves income taxes, though, because more income moves from the payer’s higher tax bracket to the recipient’s lower tax bracket, so there’s more after-tax income for them to split.
  3. Don’t run afoul of the special rules regarding support. If alimony payments are concentrated in the first year of two after divorce, the IRS may consider the money to be non-deductible property settlement. And if alimony is scheduled to end within six months of a child’s 18th or 21st birthday, the IRS may consider the alimony, in reality, to be disguised child support. Be sure you consult with a knowledgeable tax professional or attorney to review the support portion of your divorce agreement before you sign it.

    The status of child custody and child support could affect your taxes.

  4. Review your divorce decree to see who will claim the children as exemptions. If your divorce agreement does not specify who claims the children as exemptions, then the exemption for your kids goes to the custodial parent. If you have joint custody, the exemption goes to the parent who has the child the greatest number of days during the tax year. You can modify this by making a different provision in your divorce agreement. Again, if you aren’t certain where the exemptions would do the most good, on your tax return or your soon-to-be-ex’s return, see a tax professional and find out.
  5. Get signed Form 8332 if required. If you are entitled to claim the tax exemption for children who spend less than six months of the year living with you, then you will need your ex-spouse to sign IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents). A copy of this form must be filed with your income tax return for you to claim the tax exemptions for children not living with you. If you are to claim the children year after year, your ex can sign a Form 8332 that grants you the ability to claim them as long as they are eligible dependents.
  6. File first if exemptions are an issue. If you are entitled to claim the children on your return, but you think your ex may try to claim them instead, file early in the year. That way, since you’ve already claimed the children, the IRS will make your ex prove he or she was entitled to the exemption. It’s rare that this type of disagreement arises after a collaborative divorce, since you make the decision together who should claim them. 
  7. Claim the child care credit if you are eligible. If you are the custodial parent and you incur work-related child care for children under the age of 13, you may be able to claim a credit for a portion of the cost. Unlike the exemption, which can be assigned using IRS Form 8332, the child care credit is available only to the custodial parent.
  8. Review legal fees paid during your divorce. Although most legal fees are not tax-deductible, fees you paid for advice concerning the tax consequences of your divorce can be taken as an itemized deduction on Schedule A of your tax return, as can fees incurred to obtain alimony. Other fees, such as the cost of preparing a new title for your rental property, can be added to the tax basis of your assets.
  9. If you are employed, change your withholding on Form W-4. You can claim one additional exemption for every $4,050 of deductions, including alimony payments. If you are receiving alimony, consider asking to have extra tax withheld from your paycheck to cover your new tax liability. If you don’t, you should make estimated tax payments (see #10).
  10. Make estimated tax payments if withholding isn’t enough. If your withholding won’t be enough to cover your taxes for the coming year, set up quarterly estimated tax payments so that you won’t owe taxes and underpayment penalties at the end of the coming year.

Divorce may not be as inevitable as taxes, but it certainly brings complications to tax filing. Follow these ten tips, and the process should go smoothly in the future.

 

Choose Your Divorce Date

Attorney Carol Severance

by Carol Severance, Attorney at Law and Certified Family Law Specialist

You chose your wedding date and you and your spouse can choose your divorce date.

Some people think the day the Judge signs your Judgment is the day your marriage terminates. But that’s not always true.  Spouses have some control over that date.

Attorney Carol SeveranceA Judgment is an enforceable order that finalizes the terms of your divorce. It’s sometimes known as a Divorce Decree. But in your Judgment, spouses can choose the date to end their marriage with some guidelines:

  1.  In California, you have to wait at least six months from the date divorce papers are served on a spouse to terminate the marriage. But you and your spouse can pick a date that is after that six month period.
  2. You have to pick a date that allows the Judge enough time to sign your Judgment before the date you select. Your attorney can help you choose that date to allow enough time.

You don’t have to pick a date. If you decide it doesn’t matter what date the marriage is terminated, the Court will just fill in the date for you after the six month period.

Five reasons why you might want to choose your own date:

  1.  Getting health insurance when you need it. If you need to get health insurance, start your health insurance on the date you terminate the marriage.  So there’s no guessing. You will know exactly the date you need it.
  2. Avoid the wrong date. If your marriage ended on your birthday, or your child’s birthday, it would not be a date you would have chosen. So you can mutually pick a date to avoid this from happening. It may not be a reason in itself, but if you are choosing the date anyway, you can avoid meaningful dates you don’t want ruined.
  3. Tax purposes. Your marital filing status for tax purposes is determined on the last day of the year. If spouses wish to file married filing jointly, they should pick a date at the beginning of the following year to terminate the marriage, so they can file married for the current year.
  4. Social Security benefits. The ten year mark is significant for social security benefits. So if you’ve been married for nine years, you might choose a date after you have been married for ten years, just to be eligible for derivative social security benefits. This may not be beneficial to all spouses, but if it is, you should secure those benefits.
  5. Immigration process. People working through the legal immigration process may wish to delay the termination of the marriage until the process is complete.

You may even decide to decide later. This means you can submit a Judgment for a Judge to sign, but leave the date open to terminate the marriage. For example, your spouse is being treated by a doctor and does not wish to switch doctors. So the spouses choose to stay married until treatment is over. If you don’t know when the treatment is ending, you can agree to decide on that date later.

Be aware there may be downsides to delaying a termination of marriage, such as liability for your spouse’s debts and accidents, or lawsuits that may expose both spouses to liability. You also are unable to remarry until your marriage is terminated.  On the other hand, if one or both spouses may benefit , you can mutually choose your own date.

By working with your spouse in a collaborative process, you can work together with your attorneys to open up more options that may be beneficial to you. This is just one more way that collaborative divorce may work best for you and your spouse.