Property division, child custody, annoying phone calls with the soon-to-be-ex and his or her attorney, house hunting, car shopping ”“ in divorce, there is a lot of work to be done. So much work that you may not be thinking about next April when your taxes will be due once more. And unless you tackle the problem early, you may end up finding that your newly divorced status comes with some unplanned tax ramifications.
Here are a few considerations to make to ensure that you minimize the tax impact of your divorce.
- Know your deductions. Depending on how your divorce plays out, you may be eligible for some tax deductions that you would not have qualified for otherwise. If you have fees related to collecting maintenance (alimony), tax advice or the maintenance and management of property held for producing income (rental properties, for example), you can apply for deductions on those. You cannot, however, deduct legal fees from your divorce or for any child support.
- Know your filing status. Your status will depend on when your divorce is finalized; if you are still married come January 1, you will have to file as married filing jointly, married filing separately or as single/head of household. Depending on your income as well as your spouse’s, the tax implications are different. Find out which tax bracket you belong to as an individual as well as a couple, because your combined income may put you in a higher tax bracket than you need to be. You may be able to pay less in taxes if you ensure that your divorce goes through before the end of the year.
- Know how changes in your property holdings will affect your taxes. If you sell your principal residence, you qualify for something called a sale of principal residence exclusion. As long as the home has been your principal residence for two of the last five years, you can qualify for this exclusion, but how much you are allowed to claim as tax-free depends on your filing status. For single filings, the gain on your principal residence is tax-free up to $250,000. For married couples, it is $500,000. However, if you transferred your marital home or your share of it to your spouse as part of the divorce settlement, the IRS considers you to have no gain or loss. Because many divorcing couples do decide to sell the marital home, it is wise to think about how a home sale would affect your taxes before you commit to a divorce settlement.