Divorce And Taxes: 3 Ways One Affects The Other

When going through a divorce, taxes are one of the last things most people want to deal with. But, as tax season is in full swing, you may find yourself having to figure out what to do with your obligation to Uncle Sam during this time.

Here's a quick guide.

Filing Options

For federal tax purposes, your marital status on the last day of the year and whether or not you are living together generally determine how you would file.

If you are still legally married on December 31, you usually must file either Married Filing Jointly (both spouses agree to file as a couple and sign the same return) or Married Filing Separately (each spouse completes his or her own tax return but includes reference to the other spouse's Social Security number).

Most couples are likely to find that it's the most advantageous to file jointly one last time. This is because the MFS (Married Filing Separately) status deliberately disallows several credits and may cause difficulty if only one spouse wants to itemize deductions.

If you have minor children, though, it may be a little different. If the spouses have not lived together for the last 6 months of the year, one may be able to claim Head of Household as their filing status… which can result in more generous credits and lower tax liability.

Transferred Assets

Often, a divorce settlement involves some transfer of assets between the spouses. These assets can affect income tax levels, so you may want to consult with a qualified accountant or tax preparer during the divorce process. Depending on the tax rate of an asset (particularly investments taxed at the lower capital gains rates), you may need to negotiate an additional transfer of money to make things even when assets are sold.

For example, transferring a depreciable asset (such as a home or stocks) between spouses generally involves determining the "basis", or cost, of the item in order to ensure that the receiving spouse doesn't overpay taxes when he sells the asset later. Other transfers -- such as retirement accounts -- may not affect taxes at all.

Alimony and Child Support

Support payments are taxed differently, and it's important to have things in writing. Alimony is taxable income to most receivers, and the paying spouse can deduct it from their taxes. However, child support generally is not reported as taxable income. Informal payments made voluntarily could be excluded from taxable income if they are kept under the gift tax exclusion of $14,000 in 2016. These choices could affect your income taxes greatly.

It's obvious that filing taxes during and immediately after a divorce can be a little tricky. It may be best for your entire family to consult with a professional accountant with experience in divorces within your income bracket to help you navigate these muddy waters with confidence.

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