Tax seasons is upon us, and for newly divorced couples, there are a lot of changes in filing. Here are eight tips to keep in mind through this tax year.
Any fees paid to an attorney pertaining to tax advice are tax deductable. Ask your attorney to separate all billable time that was devoted to tax issues so that you can write it off.
Your legal tax filing status is determined by the status of your marriage on December 31 of the relevant year. If you are divorced by that date, you file as single for the entire year. If your divorce case is coming to a close at the end of the year, it is a good idea to talk to a tax preparer to understand the consequence of holding up or expediting the paperwork. Usually, if tax matters are substantial, courts will work with individuals to bring matters to a close by the end of the year.
The law states that the custodial parent is the one who gets to claim the dependency exemptions, but most couples choose to share the deductions. Offering a non-custodial parent the right to claim dependences if child support payments are up to date at the end of the year, often serves as an incentive to keep up with payments.
Child Care Credit
Parents with custody who incur child care costs that are work related, are eligible to deduct up to 30% of the cost. Child support guidelines usually require the parent with custody to assume responsibility for a greater share of the day care cost, since it is tax deductable for that individual.
It is important to know that child support is not tax deductable for the payer, and not counted as income to the recipient, so, If your spouse is seeking alimony, keep this in mind. Child support payments that they receive are not taxable and increase their net income each month. Therefore, the “need” of your spouse will be diminished and you may be able to argue that the imputed gross income exceeds their gross pay coupled with untaxed child support.
Alimony is tax deductable for the payer and taxed as income for the recipient. High income earners can reduce their taxable income by paying alimony. If your spouse’s tax bracket is low, the government ends up paying for a good portion of the alimony obligation.
Sale of the Home
The sale of the marital home does not involve a taxable event. Monetary gains are not taxable if you’ve lived in that house for two of the last five years. In addition, the transfer of the title to the residence is not taxable, either, allowing your spouse to keep some or all of the equity in the home. Many couples chose to forgo alimony payments and instead, pay a disproportionate property settlement to their spouse, basically buying off alimony with home equity, resulting in no tax implications for either. This is a good option for recipients in a high tax bracket.
Liabilities and Refunds
Taxes owed or refunds received are usually treated as “marital” and are split between parties, equally. All funds must be accounted for, and because a income is “marital”, a tax liability is a shared responsibility despite who brought home the paycheck.