Taxes and Divorce: 6 Tips for Women
If your marriage broke up last year or you expect a split in 2013, these pointers can help keep you from paying too much tax to the IRS
Kerry Hannon has covered personal finance for Forbes, Money, U.S. News & World Report and USA Today for nearly three decades. She's the author of Love Your Job: The New Rules for Career Happiness; What's Next? Follow Your Passion and Find Your Dream Job; Great Jobs for Everyone 50+ and Suddenly Single: Money Skills for Divorcees and Widows. Her website is kerryhannon.com. Follow her on Twitter @kerryhannon.
Our conversation made me think that this month will be messy for lots of women going through a divorce. Tax season is difficult enough when you have a solid marriage; my husband and I inevitably get into arguments as we roll through how much we spent the previous year.
But divorce can make tax prep particularly angst-ridden.
6 Tax-Saving Tips About Divorce
If you were divorced in 2012 or are going through a divorce now, I’d like to offer six quick tips that will help you avoid paying higher taxes than necessary and potential penalties. (Since the subject of taxes and divorce is tricky, I also recommend you go to the IRS’ website, irs.gov, to get its Publication 504: Divorced or Separated Individuals.)
1. Be sure to select the right federal tax filing status. It’s based on whether you were married or single on the last day of 2012.
If your divorce was finalized by year-end, file your taxes as a single person or, if you had a child and qualify, head of household status; head of household offers more tax advantages than filing as a single person. Otherwise, choose “married filing jointly.”
If you’re not yet divorced, you generally have two options: married filing jointly or married filing separately. Usually it’s better to go with jointly, advises Mark Luscombe, the principal federal tax analyst for the CCH tax advisory firm based in Riverwoods, Ill. “It tends to lower your taxes,” he says.
(MORE: Don’t Let Your Ex Ruin Your Credit)
2. Claim an exemption for your child if you’re allowed. You may be eligible to lower your taxes by taking the dependent exemption for your son or daughter if you were divorced or legally separated last year. To do so, you must have been named the custodial parent in your divorce decree.
If you were the custodial parent in 2012, you may also be eligible for the child care tax credit and education tax credits.
In some cases, the custodial parent can give the dependent exemption to the non-custodial parent by filing the awkwardly titled IRS Form 8332: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.
3. Don’t run afoul of the tax rules for child support. Neither you nor your ex can deduct child support payments you made. But child support you received isn’t taxed as income, either.
4. Avoid getting tripped up by the tax rules for alimony. If your ex-spouse paid alimony or gave you money each month to maintain your home and life, you’ll probably owe taxes on that income. Your former spouse can deduct the payments. The rules are reversed, of course, if you were the one paying alimony in 2012.
In general, if you were legally separated under a decree of divorce or separate maintenance in 2012 and you and your ex weren’t members of the same household when the alimony payments were made, the rules are the same.
Keep in mind that the IRS is strict regarding what qualifies as alimony and when the person paying it can write off the payments. Cash, checks or money orders meet the alimony test, Luscombe says, but property does not.
(MORE: 5 Ways to File Your Taxes With Less Stress)
Moreover, if you and your husband continued to share a residence after the divorce and he gave you alimony, you’ll owe taxes on those payments and he can’t deduct them.
5. Consider using alimony you received last year to fund a 2012 Individual Retirement Account. You generally need “earned income” to contribute to an IRA — and alimony qualifies. IRA contributions for 2012 can be made until April 15. The Next Avenue article “Last Call to Get Your 2012 IRA Deduction” has the details.
6. Get up to speed on how the recent tax law could affect your 2013 taxes. If you’re in the middle of negotiating a divorce agreement, some of the provisions in the law could “send you over a fiscal cliff of a different kind,” Jeff Landers writes in his recent Forbes.com blog.
Take the time to learn how the law might impact your settlement agreement and negotiate accordingly. It could save you some serious taxes, says Landers, the New York City founder of Bedrock Divorce Advisors, and author of Divorce: Think Financially, Not Emotionally — What Women Need to Know About Securing Their Financial Future Before, During and After Divorce.
For instance, alimony you’ll receive could bump you into one of the law’s new higher tax brackets. If you’ll file as a single person, any income over $400,000 will be taxed at the new 39.6 percent tax rate, up from 35 percent in 2012.
Landers is encouraging his clients to consider an upfront lump sum in lieu of alimony. That way, the money won’t be taxable to you or deductible by your ex.
Landers’ tip reminds me: If you’re going through a divorce and don’t have a financial planner, get one.
(MORE: Women and Financial Advisers: A Rocky Relationship)
Ask friends or relatives for recommendations or go to the “Find An Advisor” Search at the website of the National Association of Financial Advisors. Do an advanced search for a local adviser specializing in women’s financial planning issues and divorce planning.
After all, divorce and taxes can be a headache. Just ask my hairdresser.