Welcome to the thirty-fifth episode of Divorce and Your Money Podcast. Shawn Leamon, MBA and a Certified Divorce Financial Analyst, discusses divorce and taxes.
Three important points to know about divorce and taxes include how the timing of the divorce affects your marital status, what marital status to select for tax purposes, and the impact of alimony and child support on taxes.
Marital status is determined on the last day of the tax year. A person is considered divorced for the whole year under three conditions:
- The final divorce decree has been issued.
- The legal separation requires that you live apart.
- You might fall under what is called “the abandoned spouse” provision.
It is important to know exactly when your divorce is finalized so that know how to complete your taxes.
As long as you are divorced as of the end of the year, you are considered divorced for the whole year for tax purposes.
You need to select the appropriate tax filing status. Different tax classifications affect credits and deductions in your overall tax picture, which could have major tax consequences for you.
If you are married and file jointly with your spouse, you could be paying the lowest tax bill, which means you and your spouse will be filing and signing the same tax return.
By contrast, if you are married and file separately from your spouse, you could end up paying much more in taxes.
If you are no longer married, for tax purposes, you can file as “head of household” or “single.”
“Head of household” generally applies if you have children, which allows for some child exemptions and credits. If you don’t, you will likely file as “single.”
It is important to know what exemptions you will be able to claim to lower your tax bill. Depending on your filing status, it will change what tax credits or exemptions or deductions you may be eligible for.
The third major issue concerning taxes is that you need to understand the impact of spousal support or alimony and child support.
If you are receiving spousal support, you will most likely have to pay taxes on the income. If you are paying spousal support, you will likely be receiving a tax deduction for paying that spousal support.
If you are paying support, you could be getting a tax deduction. If you are receiving alimony or spousal support, you need to claim that as income and pay taxes on that income.
If you are paying child support, you will not receive any tax benefit. Conversely, if you are receiving child support, that is not considered income. Child support has no real tax effect.
Key Learning Points:
- The timing of your divorce affects your marital status for tax purposes.
- Select the appropriate marital status that gives you the best tax treatment.
- Spousal support and child support are treated differently from a tax perspective.
So thank you for listening to this episode of the Divorce and Your Money Show. We hope the show helps you through one of the most difficult periods in your life. Shawn Leamon is also the author of Divorce and Your Money: The No Nonsense Guide. One-on-one divorce coaching services are available at www.divorceandyourmoney.com.
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