To add insult to injury, tax season can be emotionally and financially painful for those who have gone through a divorce, whether it’s recent or happened years ago. Alimony, child support, mortgage interest deduction on the previously shared home, claiming children as dependents — these are all factors that must be considered before you hand over your tax return by April 15.
If your divorce was finalized in 2014 and neither of you remarried, then you and your ex-partner must file your taxes separately as single individuals. If you are filing as single, you can file as a head of household if you had a dependent living with you for at least half of the year and paid for at least 50 percent of the upkeep for your home. You’ll receive a bigger standard deduction and may change tax brackets.
If you split up but hadn’t yet divorced by the end of 2014, you have the option of still filing a joint return or as “married filing separately.” According to Lawyers.com., filing a joint return will usually save both parties money because you will be entitled to the lowest effective tax rate, the largest standard deduction available, and the availability of personal exemptions,
However, if you file a joint return and are divorced now, i.e. your divorce was finalized in 2015, you won’t be able to claim a deduction for alimony or spousal support and each spouse can be liable for the other spouse’s mistakes on his or her tax return.
Alimony & Child Support
What many people may not know during their first tax season after being divorced is that the recipient of the alimony money must pay taxes on the payments just as they would with ordinary income. The one who provides alimony is able to write off the payments. Unlike alimony, the recipient of child support does not have to pay taxes and the person providing it cannot deduct it.
Mortgage Interest Deduction
The partner who keeps the house in the divorce is able to capitalize on one of the most popular tax deductions: the mortgage interest deduction. Monthly mortgage payments cover the principal on the loan and the interest on the mortgage, which is tax-deductible.
In terms of a property shift in a divorce, there’s good and bad news for the recipient. The recipient doesn’t have to pay taxes on the transfer, but when the property is sold will have to pay capital gains tax on the appreciation before and after the transfer.
Miscellaneous Tax Tips
- Even if your spouse has custody of your child, you can include your child’s medical expenses that you pay in your medical expense deduction.
- If you cash out a 401(k) plan to provide alimony or money to your ex-spouse, you will have to pay tax on it as it is considered a “taxable distribution.”
- Forbes recommends considering using alimony money you received last year to fund an Individual Retirement Account. “You generally need ‘earned income’ to contribute to an IRA – and alimony qualifies,” according to Forbes’ “Taxes and Divorce: 6 Tips for Women.”
For high-net-worth individuals, you may want to consider tax season in the timing of your divorce. While it may not be the most convenient time, it could save you tens of thousands of dollars. ??
These financial issues are complicated and a lot of money could be at stake. Please make sure to consult a professional for advice when you are considering or going through a divorce. You can contact me to find out how to utilize tax season to your benefit in the midst of a divorce.