Divorce and Your Tax Return

By diamondcpas Divorce, Personal Taxes Comments Off on Divorce and Your Tax Return

Divorce brings with it a myriad of financial changes in your life.  It is critical to consult with an accountant as you go through the process to ensure that you and your attorney can negotiate important pieces of your post-divorce financial life.  

When we work with a divorcing individual or couple, we take a complete look at their financial picture and the tax implications related to each piece.  It is critical to ensure that certain parts of your divorce spell out very important details and you stay within the confines of the laws and regulations.  

After years of working closely with divorcing and divorced clients, we have the following tips to ensure you put the proper language in your divorce to protect yourself and your assets.  

  1. What is my filing status?  Unless you are officially divorced on, or by, December 31st of the previous year, you are considered married for that calendar year. Therefore your filing status must be married.  However, should you file jointly with your soon-to-be ex-spouse or separately?  We can help you crunch the numbers and review your options with you.
  2. Who can deduct the children after divorce? A parent can not take ½ of each child as a deduction even when there is a 50/50 custody arrangement.  When you have an even number of children, it might be easiest to divide the children equally among both parents.  Likewise, when there is an odd number of children you may want to alternate years when each parent takes the odd child.  Remember, the dependency deduction carries several tax advantages such as exemptions, child credits, dependent care credits and education deductions or credits, and should be negotiated carefully.
  3. Who is entitled to a mortgage interest deduction? Mortgage interest may be deductible on your tax return.  Typically the individual who is responsible for paying the mortgage and whose name is on the loan is entitled to an interest deduction.  However, if a mortgage remains intact with both parties responsible and paying towards the loan, the deduction of that interest needs to be carefully examined and clearly spelled out in the divorce agreement.  
  4. Is the receipt of alimony taxable?  Is the payment of alimony deductible?  Alimony is taxable to the recipient and considered a tax deduction to the payor under certain circumstances.  The payment must be made under a divorce or separation agreement and spouses may not live in the same household.   
  5. Do I need a QDRO?  A qualified domestic relations order is needed to transfer retirement assets from one spouse to the other.  If the QDRO is not written correctly (or at all) unnecessary taxes and penalties may be incurred.
  6. What if I have to sell the house?  Often the marital home must be sold as one partner can no longer afford it in his/her post-divorce budget.  Capital gains tax may need to be paid depending on the amount of the realized gain on the sale and the timing of the sale.  Did you make improvements to the house that may reduce your gain?  We can sit with you and guide you step by step through the process.

Confused and scared?  Don’t be.  When you work with our team we look at the particulars of your current and anticipated post-divorce financial situations.  We examine assets, support payments, budget, and retirement investments to ensure you are getting a fair deal.  We can also work with your attorney to answer questions and advise you on unique situations.

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