Five Overlooked Tax Breaks For The Newly Divorced

taxes

Divorce can be one of the most financially disruptive events in a person’s life. Lifelong dreams and plans are dramatically altered. For the newly divorced person, the time can be as economically confusion as it is emotionally confusing. It is important, with a pending divorce, to find out where you will stand tax-wise during the pending divorce and once the divorce is finalized.

There are some overlooked tax breaks that could help you financially when you are newly divorced. Filing status, claiming children as dependents, child support, alimony and separation of assets, and even professional fees should all be considered when filing your income tax return. It is important to understand the tax breaks that could help reduce the amount you pay to the Internal Revenue Service.

Here are five of the most overlooked tax breaks for the newly divorced.

Filing Status

Even if you started your divorce proceedings earlier in the year, if your divorce is not final on December 31, you can still file your tax returns jointly as a married couple. This could be beneficial in providing tax breaks for both parties of the divorce. For example, there are exclusion limits for capital gains on the sale of the principal residence if that applies. The downside is that both parties are subject to a tax audit if that happens for that year.

If the divorce is finalized as of December 31, you cannot file jointly, but you can file as head of the house- hold which can save money. If the divorce is not finalized as of December 31, you can file jointly or married by filing separately. The former option will save you more money in taxes.

Dependent Exemptions

Which parent gets to claim the children as exemptions? The rule of thumb is that the main custodial parent gets to claim the exemptions. If the parents have joint custody and each one spends equal time with the children, the parent with custodial and residential rights for more than one half of a year can claim the children as dependents. If each parent has exact equal residential time with the children, the parent paying child support or the parent with a higher adjusted gross income can claim the children as dependents and receive the exemption.

In 2015, dependent exemptions for each depended reduce taxable income by $4000. It is possible for the non-custodial parent to claim children as dependents. This can be done by the custodial parent signing a waiver. This makes sense if the non-custodial parent’s income places he or she in a higher tax bracket.

Child Support

Child Support is not deductible on income tax returns. However, certain expenses for children are, so the parent paying those expenses can deduct them. The expenses that can be deducted include certain health care expenses. Other deductible child expenses are the Tuition and Fees Deduction and the American Opportunity For Tax Credit. These are deductible up to $8500.

As for medical expense deductions, you can deduct those paid for your children even if you are the non- custodial parent. Those expenses must exceed 10% of your adjusted gross income. The medical expenses paid that year could push you over the 10% tax threshold which could be beneficial to you financially.

Alimony or Spousal Support and Transfer of Other Assets

Alimony, sometimes called Spousal Support, includes payments made from one spouse to another under the written divorce degree. Alimony must meet certain requirements. It does not include child support or non-cash property settlements.

Alimony or Spousal Support is tax deductible for the payer but not for the payee. In fact, the payee receiving Spousal Support must pay income taxes on the amount he or she receives. One exemption is property transfer. Property transfer is not taxable income to the recipient and not tax deductible to the ex-spouse paying the amount.

Another issue to be aware of with property transfers in a divorce settlement. The recipient of property does not need to pay taxes on the value, but it can shift you into a new tax basis. If you sell the property, you will have to pay capital gains taxes on the appreciation of the property before and after the sell. If you sell your home after the divorce, you can save in taxes. As long as you have lived on the property for the last 2 out of 5 years, you will not be taxed on the first $250,000 of the sale. However, the $250,000 is the maximum limit. If you lived there 1 out of 5 years, you will not be taxed on the first $125,000 of the sale. If you lived there 3, 4 or 5 years, you will be taxed on any sale over $250,000.

Other assets received in a divorce settlement can cost you if you sell it. If you sell stock, for example, you will owe taxes on the profit of the stock. Another important thing to know is that taxable alimony received can be counted as compensation to make IRA contributions. In 2014 and in 2015, if you are over 50 years old, you can contribute up to $6500 to an IRA, Roth IRA or both.

Professional Fees

Professional fees accrued during the process of divorce are generally not deductible. However, some fees are deductible. For example, legal fees for alimony or tax work, can be deducted if they exceed 2% of your adjusted gross income. It is important to have your attorney break down the fees and separate the bill between tax or alimony related work and personal business.

Attorney fees accrued during the process of divorce can not be used as deductions on income tax. However, some professional costs can be used as deductions. For example, fees paid to a Certified Public Accountant for services of consultation on property divisions. Attorney fees for collecting child support can also be deducted from income tax. Fees paid for securing interest in qualified retirement plans can be deducted for financial services dividing contribution plans. Each of these items can be deducted if they are itemized and if they are higher than 2% of your adjusted gross income.

Add Comment

Banking Budgeting Credit Cards Insurance Investing
saving money and your health
Here’s Why You’ve Been Saving Money All Wrong
Credit Card
10 Signs You Should be Looking for a New Credit Card
No Preview
Five Ways Being A Safe Driver Can Save You Money
Baby Gear
The Necessities and Niceties of Baby Gear
kids and parents
What Your Kids Really Need to See From You: An Actual Guide That is Not Bogus
perfect parents
20 Financial Mistakes New Parents Always Make
babies
The Hidden Fees You Might Experience Financially Planning for A Baby
Entertainment Fashion Technology Travel
Source: https://www.flickr.com/photos/115089924@N02/16070083419/
Lucrative Careers in Medicine for Women
Publix
10 Things To Know About Shopping At Publix
gift-made-package-loop-39341
6 Economical Gifting Ideas to Win Your Partner’s Heart All Over Again
Elf Shelf
Little Girl Calls 911 After Mistakenly Touching Her Elf on the Shelf
rewards from airlines
Airlines Shift From Miles to Price-Based Rewards
Jarvis Johnson
Man Builds a House Outside Store To Camp Out For Black Friday
No Preview
Transgender Teen Uses the Girls’ Locker Room and Now Her Community is Up in Arms
Cats Dogs
Dog in Cold
Stray Dogs And Cold Weather: Lend a Helping Hand
how much should we spend on our pets?
How Much Should You Spend On Your Pet?
Boxer
The 20 Most Loyal Dog Breeds