Posted by Fred Lake

Mistakes To Avoid In A Smart Tax Divorce

Mistakes To Avoid In A Smart Tax Divorce

Divorce is expensive: it consumes your time, energy, emotional expenses, and, of course, legal costs. And while assigning assets between spouses due to divorce has no tax consequences, repositioning assets can create cash flow and a strategy that aligns with your individual goals.  

Avoiding these mistakes will allow you to be smart and proactive with your taxes to reduce Uncle Sam's cut.

Seek Professional Advice

It pays to focus not only on the value of the assets that are being divided but also on the cash implications of that division, now and in the future. Making taxing savvy moves during a divorce will increase your chances of ending up with more money in your pocket.

And that's why you should talk to a professional because what seemed almost invisible on the surface can have several dangers hidden below. This is exactly the case with many assets that appear "equal" on the surface. 

Take Credits where it is due – Don't be humble

Are Children Part of the Divorce Equation? If so, you need to consider not only the merit of being an awesome parent but also the "credits" you can get from Uncle Sam.

Before 2018, when the new US tax law came into effect, a parent could claim a "dependency exemption" up to $ 4,000 per child. This exemption will lessen the amount of their taxable income.

In a divorce, the person qualified to apply for the dependency exemption is usually the "custodial parent," as defined by the IRS, who is the parent with whom the child has spent most of the night. If the child shares their nights equally, the custodial parent earns more money.

The new tax law "brought the value of this exemption to zero", but only until 2025, when it should return to its pre-2018 form.

While the dependency exemption costs $ 0 for your taxes today, it can still provide value now and in the future for the following reasons:

  • The exemption is scheduled for 2026, so if your children are young, make sure this precious right is carefully considered.

  • The parent entitled to the dependency of the child holds the keys to the remaining child-related tax benefits, provided their incomes are not too high. This includes the earned income credit, the education credit, the child tax credit, and the child care credit.

If you expect to make less money after divorce, think carefully about parenting and dependency exemption to ensure you make the best decisions about your divorced children so that they don't come back and bite you later.

Make use of the tax benefits for marriage.

  • Are you or your spouse involved in a business, or do you suffer losses from the sale of stocks or investments? If this is the case, you may have "loss carryforwards". These are losses from previous years that the IRS allows you to use to reduce future taxable income and the future tax bill.

  • Is there a tax refund? Make sure the refund is presented as part of the negotiations.

In the heat of divorce negotiations, it's easy to forget these amounts and let them slip away. Be sure to track the previous year's profits to identify possible transfers and include them in deal negotiations.

When getting married, be careful when signing joint declarations; If this is the case, the IRS may require an underpayment tax payment, even though the divorce is final. When in doubt, file as married, file separately or insist on a tax settlement agreement to protect yourself.


Getting started with these potentially great opportunities doesn't have to be difficult:

  • Be careful when signing joint income tax returns in divorce cases; always protect yourself first

  • Check last year's returns to make sure you don't lose credit for accumulated losses

  • Take into account the tax impact of all the assets to be divided into your settlement; make sure the after-tax numbers are factored into the decision.

  • Think about the implications of making tax decisions for kids, especially exemption from dependency.

Better to hire a smart team that includes an experienced divorce lawyer and financial professional on your side to get the most out of your taxes so you can focus on enjoying the next chapter in your life after divorce.

Fred Lake
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