Your divorce is already complicated enough; tax issues that arise during your divorce can only make matters worse. The I.R.S. does not have the resources to help you financially get through your divorce. You should always follow tax advice from a licensed accountant. But here are some things to keep in mind to get you on the right path.
As you move through the divorce process, keep in mind that you can elect to file your tax return either as: (a) married filing jointly, (b) married filing singly or, (c) as single and/or head of household. If you are married on December 31st of a given year, then you are considered married for that tax year.
Many of our clients make over $450,000.00 a year. If you did this tax year, then you are in the highest tax bracket for a single person. Being married, however, is a tax benefit. So consider pushing your divorce into the following year.
On the other hand, if you and your current spouse both made $250,000.00 this tax year, as single people, you are not in the highest tax bracket, but with your incomes combined at $500,000.00, you are in the highest tax bracket. Under these circumstances, it may be more beneficial to push your divorce through this tax year.
Married filing jointly is typically the most tax advantageous filing status. However, if your spouse incurred a lot of medical expenses during this tax year, then filing your returns as married filing separately may make more sense. If you believe your spouse is creating tax trouble, consult with your licensed accountant and if recommended, file separately.
Female clients who plan to resume the use of their maiden names after the divorce should not use their maiden name on their tax return; at least, not until the change is made with Social Security Administration first. If your maiden name is used on your tax return before the change takes place, this will cause additional delays since I.R.S. will not be able to match your name used with the records kept at the Social Security Administration.
The parent with whom the child spends more nights is considered the custodial parent for tax purposes. This is the parent who usually gets to take the dependent tax credit when filing their tax returns. However, the parents can trade the dependency credit by agreement from year to year, or, if one parent makes too much or too little money to benefit from this credit. A parent who has provided more than half the cost of a home for the child and who has been living apparently for more than six months can still qualify as head of the household.
A divorce may often result in the sale of the parties’ former marital residence. If the residence was used for two of the last five years, then it qualifies for tax benefits under this tax exclusion. When the residence sales, for those filing as single and/or head of household, $250,000.00 of the capital gain on the principal residence is excluded from taxation. In other words, the gain is not taxed. For those married and filing jointly, $500,000.00 of the capital gain is not taxed. It is typically better from a tax perspective to have a larger exclusion to avoid having to pay more taxes on the gain upon the sale of the residence.
The mortgage interest deduction is an itemized deduction that allows homeowners to deduct the interest they paid on any loan used to build, purchase, or make improvements upon their residence, from the tax payer’s taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations. The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098. This deduction is offered as an incentive for homeowners. Taxpayers are limited to deducting $1.1 million for acquisition and home equity indebtedness. Recently, a court allowed unmarried taxpayers who own a home together to each apply the $1.1 million limitation.
Attorney’s fees and other professional fees paid by the client to collect alimony, for tax advice, for the management and conservation of property that is held for the purpose of generating income are deductible. However, legal fees for divorce and legal fees incurred for the collection of child support are not deductible.
Under current tax law, some tax carryovers can be negotiated as part of a divorce settlement. The tax code generally treats marital and separate property differently. We understand the potential tax implications that come with how tax carryovers are allocated. We recognize that these carryovers, much like property, can have considerable value to our client and should be included in negotiations when assets and liabilities are divided. Charitable contribution carryovers are calculated based on the ration of amounts that would have carried forwards if the couple had filed separate returns in the year the contribution was made. Generally speaking, capital loss carryovers are based on the individual net losses that created the carryover.
The parent who pays child support cannot claim the amount he or she paid as a tax deduction. The parent who received the child support payments does not have to claim the amount received as income. Effective January 1, 2019, under the Tax Cuts and Jobs Act of 2017 (TCJA), the spouse who pays spousal support can no longer claim the amount paid as a deduction on their tax return. Moreover, the spouse who receives spousal support payments is no longer required to report the amount they received as income, thus, avoiding having to pay taxes on the money received. For some of our clients, this may affect the tax bracket in which they belong.
Life insurance policies are a great way to ensure that alimony and child support will be paid even where the payer dies. Support trusts in lieu of alimony are another way to ensure continuing payments. They offer less interaction between former spouses, can protect ownership of closely held family businesses and continued support even after the grantor dies.
A qualified domestic relations order or often referred to as a “QDRO” is a court order that allows divorcing spouses to roll a part of one spouse’s pension plan into an individual retirement account (“IRA”) for the other spouse without tax consequences and penalties. Often times, the early distribution penalty is waived. A QDRO may also offer distance from a former spouse, greater control over investments, more beneficiary designation options, the potential to deduct fees and no mandatory withholding. However, staying in the former spouse’s pension plan, on the other hand, can mean fund access for those younger than 59 1/2, possible protection from creditors, loans and/or hardship distributions, and an option to retain life insurance. Since there is no limit on the amount of the rollover, it may be beneficial to leave some money in the ex-spouse’s pension plan and roll over a portion of it into an individual retirement account. IRA transfers are also not taxable, and they let the recipient name his or her own beneficiaries. A former spouse can and will get the money if you do not update your beneficiary designations. Thus, it is imperative to make sure that you change the beneficiary’s designations for retirement plans, insurance policies, and trusts. They should also name new health care agents to make decisions in case they are not able to do so.
One of these issues involves the tax consequences of your divorce. We have an in-depth understanding of tax laws and we work with our clients to ensure their divorce settlement works to your advantage. Come see us today. To schedule an appointment by calling 828-452-2220 or fill out our contact form so that someone from our office will contact you.
Your divorce is already complicated enough; tax issues that arise during your divorce can only make matters worse. The I.R.S. does not have the resources to help you financially get through your divorce. You should always follow tax advice from a licensed accountant. But here are some things to keep in mind to get you on the right path.
As you move through the divorce process, keep in mind that you can elect to file your tax return either as: (a) married filing jointly, (b) married filing singly or, (c) as single and/or head of household. If you are married on December 31st of a given year, then you are considered married for that tax year.
Many of our clients make over $450,000.00 a year. If you did this tax year, then you are in the highest tax bracket for a single person. Being married, however, is a tax benefit. So consider pushing your divorce into the following year.
On the other hand, if you and your current spouse both made $250,000.00 this tax year, as single people, you are not in the highest tax bracket, but with your incomes combined at $500,000.00, you are in the highest tax bracket. Under these circumstances, it may be more beneficial to push your divorce through this tax year.
Married filing jointly is typically the most tax advantageous filing status. However, if your spouse incurred a lot of medical expenses during this tax year, then filing your returns as married filing separately may make more sense. If you believe your spouse is creating tax trouble, consult with your licensed accountant and if recommended, file separately.
Female clients who plan to resume the use of their maiden names after the divorce should not use their maiden name on their tax return; at least, not until the change is made with Social Security Administration first. If your maiden name is used on your tax return before the change takes place, this will cause additional delays since I.R.S. will not be able to match your name used with the records kept at the Social Security Administration.
The parent with whom the child spends more nights is considered the custodial parent for tax purposes. This is the parent who usually gets to take the dependent tax credit when filing their tax returns. However, the parents can trade the dependency credit by agreement from year to year, or, if one parent makes too much or too little money to benefit from this credit. A parent who has provided more than half the cost of a home for the child and who has been living apparently for more than six months can still qualify as head of the household.
A divorce may often result in the sale of the parties’ former marital residence. If the residence was used for two of the last five years, then it qualifies for tax benefits under this tax exclusion. When the residence sales, for those filing as single and/or head of household, $250,000.00 of the capital gain on the principal residence is excluded from taxation. In other words, the gain is not taxed. For those married and filing jointly, $500,000.00 of the capital gain is not taxed. It is typically better from a tax perspective to have a larger exclusion to avoid having to pay more taxes on the gain upon the sale of the residence.
The mortgage interest deduction is an itemized deduction that allows homeowners to deduct the interest they paid on any loan used to build, purchase, or make improvements upon their residence, from the tax payer’s taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations. The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098. This deduction is offered as an incentive for homeowners. Taxpayers are limited to deducting $1.1 million for acquisition and home equity indebtedness. Recently, a court allowed unmarried taxpayers who own a home together to each apply the $1.1 million limitation.
Attorney’s fees and other professional fees paid by the client to collect alimony, for tax advice, for the management and conservation of property that is held for the purpose of generating income are deductible. However, legal fees for divorce and legal fees incurred for the collection of child support are not deductible.
Under current tax law, some tax carryovers can be negotiated as part of a divorce settlement. The tax code generally treats marital and separate property differently. We understand the potential tax implications that come with how tax carryovers are allocated. We recognize that these carryovers, much like property, can have considerable value to our client and should be included in negotiations when assets and liabilities are divided. Charitable contribution carryovers are calculated based on the ration of amounts that would have carried forwards if the couple had filed separate returns in the year the contribution was made. Generally speaking, capital loss carryovers are based on the individual net losses that created the carryover.
The parent who pays child support cannot claim the amount he or she paid as a tax deduction. The parent who received the child support payments does not have to claim the amount received as income. Effective January 1, 2019, under the Tax Cuts and Jobs Act of 2017 (TCJA), the spouse who pays spousal support can no longer claim the amount paid as a deduction on their tax return. Moreover, the spouse who receives spousal support payments is no longer required to report the amount they received as income, thus, avoiding having to pay taxes on the money received. For some of our clients, this may affect the tax bracket in which they belong.
Life insurance policies are a great way to ensure that alimony and child support will be paid even where the payer dies. Support trusts in lieu of alimony are another way to ensure continuing payments. They offer less interaction between former spouses, can protect ownership of closely held family businesses and continued support even after the grantor dies.
A qualified domestic relations order or often referred to as a “QDRO” is a court order that allows divorcing spouses to roll a part of one spouse’s pension plan into an individual retirement account (“IRA”) for the other spouse without tax consequences and penalties. Often times, the early distribution penalty is waived. A QDRO may also offer distance from a former spouse, greater control over investments, more beneficiary designation options, the potential to deduct fees and no mandatory withholding. However, staying in the former spouse’s pension plan, on the other hand, can mean fund access for those younger than 59 1/2, possible protection from creditors, loans and/or hardship distributions, and an option to retain life insurance. Since there is no limit on the amount of the rollover, it may be beneficial to leave some money in the ex-spouse’s pension plan and roll over a portion of it into an individual retirement account. IRA transfers are also not taxable, and they let the recipient name his or her own beneficiaries. A former spouse can and will get the money if you do not update your beneficiary designations. Thus, it is imperative to make sure that you change the beneficiary’s designations for retirement plans, insurance policies, and trusts. They should also name new health care agents to make decisions in case they are not able to do so.
One of these issues involves the tax consequences of your divorce. We have an in-depth understanding of tax laws and we work with our clients to ensure their divorce settlement works to your advantage. Come see us today. To schedule an appointment by calling 828-452-2220 or fill out our contact form so that someone from our office will contact you.
