Divorce is hard and horrible. But at times, love turns sour, and two people have to part ways. The singular decision of parting ways involves many things. There are a ton of decisions to make, like selling the house or not, what happens to the kids, who gets the pet, and soon.
Divorce comes with a lot of emotional weight, and tax concern is often the last thing on the couple's mind. The couple, however, cannot ignore tax concerns as it comes with severe consequences. If you do not plan for life as a divorced taxpayer, life might deal recklessly with you.
This article will talk about important tax implication of divorce
Property Settlements
For people facing divorce, property settlement is one of the most delicate issues they will have to face. The hard part is not about who gets what part of the tax. Many at times, each individual takes whatever the other party does not want. Whatever is left, they will use any ratio they agree on, such as 50/50 or 60.40, to share.
The tax implication, however, is what makes property settlement hard. There are assets such as mortgages that come with tax benefits or liabilities, and others do not have any. One might unknowingly take something that lands a huge tax bill on your neck.
To avoid these, you can use a property settlement calculator that gives you the market value of the asset involved, alongside the tax bill and the after-tax cost of each
Child Support Payments
You cannot deduct child support payments on your income tax return, contrary to what many couples think. Many people perceive this as unfair, basing the argument on the fact that the recipient benefits from an unearned income.
With that in mind, deducting child support payment using a different name like family support is a bad idea. The IRS will reject such.
You cannot deduct child support; hence your best point of call is to pay it as long as you are specified to.
Child Exemptions
If you have kids, another critical tax issue you need to deal with when facing divorce is the recipient of the tax benefits and exemptions relating to the kids.
Parents in charge of child custody will have the child exemption. On the other hand, some parents can agree to waive this rule. In such a case, one of the spouses will claim the exemption, when this happens, if any spouse takes the child's exception, it will not stop you from claiming head of household filing status.
For people with bitter divorce, getting the exemptions turned to you is low, especially for people whose ex is the custodial parent. If the divorce is nor painful, this is a possibility. You need to know that the person claiming the exemption will file Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) every year.
Alimony/Spousal Support
The tax implications of alimony are unique. The ex-paying alimony can deduct them from the tax. It is a terrible idea for people who want to be smart and think of claiming child support or property settlement money as alimony.
"If alimony appears to be "front-loaded," which means that there was a concentrated payment within a brief period after the divorce, the IRS may consider the money to be property settlement funds (which are not deductible). Additionally, if alimony ends within six months of a child's 18th or 21st birthday, the IRS may trigger an investigation to determine if the maintenance is, in reality, disguised child support."
The receiver of the alimony must pay taxes on it. One of the prerequisites to alimony payment is that both spouses must file their return separately.
Head of Household Status
Another pressing matter when it comes to divorce is which party claims the head of household filing status on their income. The reason is not far-fetched as Heads of households will enjoy pretty generous tax brackets and huge standard deductions.
For the IRS to accept anyone as the head of the household, they must file their distinct tax return. Both ex-couples should not have lived together in the last six months of the tax year. You also need to have a “qualifying child” that has stayed with you for over six months. It does not matter if your spouse claims a dependent on the said child.
