Don’t forget that when your marital status changes, so does your status with the IRS
Here are a few steps you can take to get your financial affairs in order and minimize the tax hit that often accompanies a divorce.
- Consider Your Filing Status – Anyone who is still married on December 31st is considered by the IRS as married for that tax year. Smart planning can reduce your tax obligation. For example: if you earn $450,000 a year or more and you are single, you are automatically in the highest tax bracket. Not so, if you are married. In this particular situation, staying married on paper will reduce your tax burden considerably. On the other hand, if both you and your spouse earn over $250,000 a year, it makes sense to go ahead with the divorce.
(Note: If there is any question about tax trouble looming for your spouse, always file separately).
- Use the Dependency Exemption Wisely- If there are minor children involved, the primary custodial parent usually claims the dependent credit. This isn’t set in stone however, and if one parent made too much or too little to benefit from the credit, it can be traded back and forth.
- Mortgage Interest Deduction – A recent court ruling said unmarried taxpayers who still own a home together can both claim the entire amount, up to the maximum limit of $1.1 million.
- Payments After Divorce –
If you owe child support, it isn’t tax deductible. Alimony, however, is both tax deductible and taxable, so the party receiving payments will need to consider this.
- Beneficiary Designation–
One important step that is sometimes overlooked is changing the designated recipient on things like insurance policies, retirement plans, and trusts. If you don’t update the beneficiary information, your ex will be the recipient.