Did you know that, in America, there is one divorce about every 36 seconds? That’s nearly 2,400 divorces per day, 16,800 divorces per week and 876,000 divorces per year.
With tax season upon us, that means approximately 876,000 people are newly navigating the realm of post-divorce taxes. Taxes are complicated enough as it is, but when you add in assets, dependents, alimony, child support and other freshly split obligations, filing can be downright daunting.
Here, the five most important things to keep in mind when facing this new challenge.
1. Marital status is set as of Dec. 31, not April 15
If your divorce was finalized after Jan. 1 but before you filed your taxes, you are still officially married as far as your 2014 taxes are concerned. In other words, your marital status as of Dec. 31 determines your filing status for that entire calendar year.
Although you cannot file jointly, you may be able to file as a head of household, depending on particular qualifiers such as length of cohabitation, cost of home upkeep, et cetera.
2. Home is where the taxes are
Upside: You don’t have to pay taxes on transferred property in a divorce, and if you’re retaining the residence, you can claim the mortgage interest deduction.
Downside: Now that you’re single, capital gains exclusion laws work less to your advantage. As a result, if you eventually decide to sell your home, your profit from the sale may be significantly reduced.
3. Alimony is tax deductible, with some caveats
In most cases, alimony is tax deductible for the party paying it; in fact, it’s an above-the-line deduction, meaning it does not need to be represented as an itemized claim. However, a few conditions should be kept in mind:
- Alimony payments made while both parents of the child are still living together are not tax deductible.
- While cash, checks and money orders meet alimony standards, property contributions do not.
4. Custodians clean up on tax returns
Modern custodial agreements rarely designate a sole custodian, which makes taxes a little more difficult. Typically, the custodial parent is considered, by default, the parent who has physical custody for most of the year. However, many couples now alternate who claims custody each year in order to share the tax benefit.
Also, keep in mind that child support is always tax-neutral, which means that even if you’re paying it, it is not tax deductible in any way.
There’s one little loophole, however. If you continue to pay a child’s medical bills, even without custody, those costs can be included as a medical expense deduction.
5. Be careful with your 401(k)
Your retirement should be handled with the same care it took to earn it. Cashing out a 401(k) to use in a settlement is subject to taxes; however, this tax trap can be avoided if the transfer is done under a qualified domestic relations order, or QDRO. A QDRO grants your ex-spouse the right to the funds without the imposition of taxes.
As always, if you have any doubts about how to file your taxes due to a divorce, contact your attorney and your accountant. They are best qualified to give advice for your unique situation.