Don’t Overlook Tax Assets in Divorce
During your divorce, there are hundreds of things to think about every day. But, many people fail to consider how divorce will impact their taxes. It is important to understand that your financial changes due to losing a contributing member of the household income greatly impact what you owe on your Federal taxes.
Consider How Divorce Will Affect Your Taxes
Most divorcing couples are aware that their divorce will cause them financial loss. Dividing property, paying for separate housing and bills, and legal fees all negatively impact annual income. These are expenses that are usually prepared for. The area which many divorcing couples fail to prepare for is tax requirements. Changing tax brackets due to divided household income and many other factors need to be accounted for if you plan to divorce your spouse.
Child Support Payments
Understanding how paying or receiving child support can be difficult for many newly divorced parents. Typically, child support is not a qualifier for tax payments or breaks.
Recipient – not considered income
Payer – support payments are not tax-deductible
There are a few exceptions when the IRS will consider child support payments as taxable income.
- Dependency exemption
- Child care tax credit
- Medical and Health care expenses
Alimony Support Payments
Alimony payments are a different matter. There are situations that may deem otherwise, but typically alimony will be considered when you file your taxes.
Recipient – potentially included as income
Payer – tax deductible (dependent on tax bracket unless granted a court to not consider spousal payments as taxable)
You must provide a copy of the court order with each annual filing to ensure the IRS acknowledges the income filing amount.
Tax Consequences of Property Settlement During Divorce
During property settlement, make sure you know the tax obligation of the property is being divided. Specific assets can trigger taxable events. Don’t overlook tax value when separating your property from that of your spouse.
Transferring property acquired from divorce to a family member can be scrutinized by the IRS and thus require tax payments.
Changing Your Tax Filing Status After Divorce
Prior to divorce, married couples file as “married filing jointly” on tax returns.
After divorce, each person is required to file as single or head of household. Make sure to update your W-4 form to avoid incorrect filing status. Your taxable income must be adjusted to ensure correct income tax payments. Otherwise, you will be required to pay higher amounts in a lump sum during tax season.
These changes can significantly increase your tax responsibility. The amount owed is based on a percentage, not the actual dollar value. So, you may pay less but the percentage that you pay based on your newly lowered income can be higher.
Losing Tax Breaks, Credits, and Deductions
Divorce reduces the tax breaks that can be claimed during filing.
Factors that cause lost tax breaks:
- Parent without Child Custody (loss of child tax credit)
- Loss of Head of Household status
- Reduced Monetary Cap on Tax Breaks with Income Limits – Caps off at lower value for single filers than married counterparts
Here are some common credits with income limits:
- Savers Credit
- Earned Income Credit
- Premier Tax Credit
Look for New Tax Breaks to Help Your Post Divorce Finances
Your tax professional can help you find breaks that can improve your financial standing post-divorce. It is better to plan ahead and start finding these credits and deductions well before it is time to file. You may be able to find opportunities that could be missed if waiting until the last second.
Contact a Divorce Law Firm in Raleigh
Taking advantage of professional support from a CPA and your Raleigh divorce attorney will be the best chance for financial stability during your divorce. These professionals understand how the law affects someone in your position and can guide you through the process. Our legal team is ready to help you. We can be reached by calling 919-301-8843 or by completing the form below.
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