#8: Divorce and Tax Preparation
This is the eighth installment of “Divorce. What You Need to Think About from a Financial Perspective”, which can be downloaded for FREE from makara-assoc.com.
Many issues arise when it comes to going through the divorce process. One of the most difficult financial issues in the initial stages is the impact your divorce will have on capital gains and income taxes.
When filing taxes, you must consider issues such as:
- Timing of the divorce
- Income splitting
- Deducting of expenses
- Claiming children as dependents
An individual needs to provide 50% of monetary support and a principle residence for a child to qualify as a dependent under the tax code. Keep that rule in mind when working through the process.
With the difference in tax rates, lost deduction and tax credits of filing separately vs. jointly, you should have carefully thought out conversations regarding this issue. It can be a major tool in final negotiations for the individual with lower income. You should prepare the return(s) both ways based on an agreed upon income and deduction split.
If the joint return has significant tax savings compared to filing separate, have each spouse indemnify the other to unreported income and file a joint return.
With attorney fees and other professional costs, divorce can be a costly process. So, you should take advantage of any tax savings, as this can go a long way.
Abandoned Spouse Rule:
Abandoned spouse rule allows a married person to be considered unmarried and file as head of household under the Internal Revenue Code [IRC sec 7703(b)]. This filing status has a lower tax rate and gives the taxpayer the ability to take tax credits, which are not available if filing a “married filing separate” tax return.
To qualify, the taxpayer(s) must have lived apart for over half the tax year, any contact or nights together can disqualify head of household status. Also the taxpayer filing head of household must maintain and cover the cost of a principle residence for themselves and a dependent child.
When it comes to assessing and dividing your finances, you may also want to contact a Certified Public Accountant or other professional to assist you with the financial aspects of divorce.
To learn more about planning for a divorce, click the eBook on the right to download it FREE!
Also, please feel free to contact us online or call (239) 384-9688 in Naples or (239) 768-5008 in Fort Myers if you have further questions.
-Mark
This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.
LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.
