Tax Hacks For Divorce

tax-divorce

We get it—taxes are dull. Perhaps that’s why, in a feat of irony, nobody learns how to do them in school. For their monotony, however, taxes are a clever system. They may not seem like a big deal, but these devils can add up quick.

Our fore-parents knew the cost of taxes and were pretty riled-up by it. Indeed, it was a new tax on tea that basically resulted in the Revolutionary War. Ashes to ashes, taxes to taxes.

In the spirit of patriotism, it’s relevant to examine situations in which it’s possible to (legally) minimize losses in taxes. This is especially possible in “life events” situations—moving, marriage, and, for this article—divorce.

In the whole sordid affair of getting a divorce, you probably just want it to be over. Equally, because it’s usually a one-time thing, the whole event may be settled before anyone realizes the implications. So, read up this overview and then ask your attorney relevant questions. It could save you thousands!

 

The Settlement:

Division of Assets:

Depending the state, the division of assets will either be equal or equitable (“fair”). Regardless, an ideal settlement will give both parties a mix of assets, because different types of assets incur different taxes. Consider the following:

Money in a bank account has already been taxed, so you can access it at face-value any time.

To cash out investments (stocks, bonds, mutual funds, etc.), you must pay a capital gains tax. For 2016, this is either 15% or 20%, depending income and timeframe.

With retirement accounts, you may be subject to a penalty by pulling money out before age 60. You can override this penalty in a divorce settlement, but the transfer will still be taxable as income. To avoid this, transfer funds from one spouse’s retirement account directly into that of the other.

The family home can be transferred to just one of you, which is tax free. If you’re planning to sell it, and it has gained value during your time there, it may be a better idea to do it while married. Married couples get $500,000 tax-free before paying capital gains tax on the rest. That dollar amount is half for a single person.

Alimony:

Alimony is a tax-deductible expense and taxable income, depending your side of the equation. This is true as the payment is in cash or check (and not assets), you two are filing taxes separately, and you don’t live together.

Child support:

Child support is not tax deductible, nor is it taxable income. It is considered “tax neutral” as it is for the benefit of the child. If you want those tax benefits, a potential alternative is “family support”, which ties child support and alimony into one payment. This payment, like alimony, is fully tax deductible.

Furthermore, if you’re paying child support, you can usually apply for a tax credit. To be eligible, you must have paid all of it as mandated and earn below a certain income level.

Adjusting for next April?

An adjustment of divorce is tackling solo all the “life tasks”. Ah the joys of filing taxes separately!

The W-4 tax form is one that you fill out for work. It tells them how much to tax your income. It doesn’t have to be exactly right, though, to underpay means you’ll be hit with a large bill after tax day (and potentially a fine). Post-divorce, you’ll likely need to adjust the “allowances” on your W-4. As your household is smaller, it stands to reason that you’ll pay more in taxes than before.

If you have a kid, they can only be claimed on one parent’s taxes. By law, the parent with main custody gets to claim the kid for their taxes, That said, some couples work together to switch-off yearly for a long term win-win situation.

Marlo Spieth blogs and does business development for Avvo. Seattle-based Avvo is a website with an answer when you’re thinking, “Is that even legal?” We can also help you get a lawyer, a tax form, or an online divorce.

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