The first thing certified divorce practitioner Clay Caldwell tells his clients is to “reach agreements with each other.” It’s very important, he said, to talk with your spouse and straighten out money issues. It’s very easy to lose money if the separating couple isn’t communicating.
Decide the best way to file your taxes
There are three options when filing for taxes. Filing as "Head of Household" saves you the most money and varies with income. In order to qualify under this label, you must pay more than half the cost of keeping up the home and a qualified person, such as a child, must be living with you.
The second option is to file jointly. If you have not filed for divorce before Dec. 31, filing jointly is more beneficial to you and your spouse, according to experts. Joint filing means you are both responsible for all taxes and are each entitled to a prorated share of any refunds. It also puts you in a better tax bracket. If there are additional taxes or penalties because of fraud or negligence on past returns, you could qualify as an "innocent spouse," according to Caldwell.
Filing separately is the last way to file. This option usually means paying the most taxes. The good news, however, is that you are only responsible for your own taxes.
Choose who will claim the children
Deciding who will claim the children depends on many things. Couples should figure out who has the higher income and who sits in the better tax bracket. The parent who establishes custody gets a dependency exemption, which could come to about $3,000 per child.
Child support is not tax deductible because it’s considered something you’d pay whether or not you are divorced. However, alimony or “maintenance” is tax deductible.
State tax laws differ on divorce. Some states, such as Texas and California, are known as common law or community property states. These states treat all property owned by a married couple as a shared asset. “When you file for divorce everything is subject to division,” said Ken Raggio, a Dallas-based divorce lawyer. California, for instance, splits community property 50/50.
Property transferred between spouses isn’t subject to taxes. But selling stocks, homes and vacation homes as part of a divorce are taxed. A jointly-owned residence that one spouse has been granted the use of is tax deductible contingent upon agreements between the couple and IRS regulations. "If the non-residential spouse has agreed to pay the expenses, half the mortgage payment may be deducted as alimony, and the other half deductible as interest expenses,” said Caldwell.
Follow up on beneficiary forms after the divorce
The last tip, and perhaps the most complex divorce tax issue is retirement. “Retirement rules are so complicated, without a lawyer people can lose a lot of money,” said Lee Rosen, a North Carolina tax divorce lawyer.
All retirement benefits including qualified and unqualified plans, vested or unvested stock options, restricted stock or any other form of deferred compensation are divisible in a divorce. The transfer of retirement benefits is not taxable. Retirement benefits from an ex-spouse are taxable as ordinary income when withdrawn. You will also be taxed if you use the retirement benefits before age 59½ or don’t roll them over the right way.
When it comes to taxes in divorce, people are getting a lot smarter because they don’t want to lose money, experts said. “Time is money in divorce law,” said Caldwell. It’s very unlikely you will figure out all the tax issues alone with your spouse. Keeping that in mind, any professional tax advice prior to your divorce is tax deductible, so it may be worth it to get some financial guidance.
SOURCE: Fox Business