TAX TIP TUESDAY: Don't Let a Divorce be More Taxing Than Necessary

When you're going through a divorce, taxes are usually the last thing on your mind. Nevertheless, you’ll need a financial plan. Here are a few things to keep in mind when you’re ready to preparing:

Alimony and child support

Up until 2019, alimony has been considered taxable income to the person who receives it, and deductible by the person who pays it, as long as certain requirements are met. Starting 2019, alimony is no longer a taxable event for either party.

Property settlement

When a divorcing couple agrees to a property settlement, there are typically no immediate tax liabilities. Once the property is sold, taxes begin to get tricky. Each spouse receives property with its original tax basis, which could trigger a large capital gain down the road. A truly equitable property settlement should also consider the tax basis of assets, in addition to current market value.

Children

In most cases, the parent who has custody of a child for the greater part of a year will claim that child on their tax return. However, the custodial parent may choose to transfer the exemption to the other parent.

Why give away a deduction? Well, it may be worth more to your ex-spouse. In exchange for the dependency deduction, you may be able to bargain for increased alimony, or even a larger property settlement.

Filing Status

Until now, you’ve probably been filing tax returns jointly. Once the divorce is final (and maybe even during divorce proceedings), your filing status will be either Single or Head of Household. To qualify as Head of Household, certain requirements for dependents must be met.

Marital status is an important factor when it comes to the taxes you will owe. The best way to get ahead of these changes is to get started early. Call 805-496-2828 for help with tax planning and preparation.