Taxes and Divorce - How to maximize tax benefits and minimize taxes owed
The best time to file for divorce to maximize tax benefits and minimize taxes owed is before December 31st. A taxpayer filing status is based on their status on that date. For example, if you divorce by December 31st, you are considered single for the entire year. Yes! The IRS is lenient that way. It allows the taxpayer to start off fresh and without the hassle of contacting a soon-to-be ex-spouse to file married filing joint or obtain their social security number to file married filing separate.
Other tax considerations include the following:
- If any court-ordered alimony payments are made before December 31st, they are deductible by the person making the payments and taxable to the person receiving the payments.
- Legal fees paid to arrange alimony payments are deductible as a miscellaneous expense if you itemized on your tax return.
- Child support is not deductible or taxable.
- IRS Form 8332 can be used to allow the custodial parent to release the exemption of the dependent child(ren) to the non-custodial parent. However, the custodial parent cannot use the higher standard deduction of Head of Household or claim any child-related tax benefits.
- Non-custodial parents can deduct their child(ren) medical expenses even if they do not claim their exemption. Medical expenses are deductible if they surpass 10% of a taxpayer's adjusted gross income.
- Exchange the martial home to one spouse so that there is no tax consequence to either party at the time of the transaction.
- Exchange retirement interests to one spouse so that there is no tax consequence to either party at the time of the trade.
- Consider using alimony you received last year to fund an Individual Retirement Account (IRA). Since alimony is taxable you can make some of it deductible by opening an IRA.
