Marriage On The Rocks? How Will It Affect Your Taxes?
Divorce is typically an unpleasant subject; and taxes are usually not anyone’s favorite thing to discuss, either. Combine the two and it’s not exactly a match made in heaven. However, in the event that you are considering divorce, about to file for divorce or already going through the legal split-up process, then unfortunately you will need to take a serious look at your tax situation. Despite the fact, that you’ve already got hundreds of other pressing issues on your mind, you can’t afford to overlook this important part of divorce.
Choose Your Filing Status
The first thing you will have to consider is your filing status, which is very important right now with tax season currently in full swing. There are two possibilities here but how you file will make a big difference in your tax bill or refund. If by law you were still married on the last day of 2014, meaning your divorce was not yet final, then you can still file jointly with your estranged spouse. However, if you legally split up before the clock struck midnight on January 1, 2015, then you have other options.
Credit for the Children
For example, let’s say you have children that you plan to claim as dependents. You can now file as a single head of household, which means you could get a larger tax break. However, that leads to the question of who gets to claim the kids as dependents? Of course, you and your spouse can settle this issue out of court as far as it pertains to taxes. If the kids split time living with both parents equally during the year then the issue is fairly simple. You can both claim half of the deduction. However, there are other circumstances that can come into play.
Child Support and Alimony
Let’s say one of you makes too much to claim the child tax credit for your qualifying dependent children, for example if you have to pay the Alternative Minimum Tax (AMT). In that case, the one who has to pay the AMT should just let the other party claim the kids as full-time dependents and therefore receive the full credit of $3,950 for each child. Meantime, another important aspect of taxes in regards to children is child support. Come tax time it’s kind of a double-whammy for the payer. That’s because the parent who pays child support also pays taxes on those payments. On the other hand, there is some good news for the spouse who pays alimony. That money can be used as a deduction, while the receiver must pay taxes on it.
Other Factors to Consider
Besides determining who gets to claim the children, divorce has several other affects on your tax situation. For example, taxes on retirement plans, profit from the sale of a home and your mortgage interest are all affected by divorce. If you decide to sell the marital home you can still avoid taxes on gains of up to a $500,000 if you file jointly. However, that number is cut in half if you file as a single head of household. If you think you could make a larger profit than these figures, then you should carefully time the sale of your home and your divorce. Meantime, whoever ends up keeping the house, regardless of who pays the mortgage, gets to claim the mortgage interest deductions. On the other hand, if both parties still share ownership, then they both get to share that deduction equally.
Careful With Your Retirement Plan
Lastly, if you have a retirement plan, and you use a Qualified Domestic Relations Order to transfer the money to your spouse, then you can both avoid a tax penalty. However, should you decide to withdraw funds and give them to your spouse then you will be subject to the standard early withdrawal penalties and the income will be taxable.
Get Educated and Be Prepared
The bottom line is going through a divorce is tough. Having to worry about your taxes might not be your first priority, but by educating yourself and being prepared for all the possibilities you can save yourself a lot of potential headaches. Not to mention, a lot of money.