Kiplinger’s recent article entitled “What Women Should Know about Post-Divorce Tax Planning” says that managing the post-divorce finances and tax implications involve more than just a change in filing status. When you get divorced, understanding the more subtle aspects of tax planning is an important step for women in managing your finances. Here are a few considerations to keep in mind to simplify the process.
Filing status. This is determined by your marital status as of December 31. It will change to one of two options: Single or Head of Household. If you and your ex-spouse have children, and your home will serve as their primary residence for more than half the year, you can file as Head of Household. However, if your divorce is not final during the tax year, check the filing rules in your state.
Division of property. The tax deduction for home mortgage interest and real estate taxes are a big issue during divorce. Understand who has the right to claim the deduction and accurately account for those payments. The higher standard deduction under the Tax Cuts and Jobs Act may reduce the tax benefits, if these expenses are being divided. Ownership of the home and the amounts paid for the mortgage determine who takes the tax deduction. If you share a mortgage, the deduction on your tax return should show your part of the expenses paid, with the same applied for your ex-partner because he or she can also take deductions in proportion with the amount they are paying.
Claiming children as dependents. The separation agreement may say which parent gets to claim which child. If the divorce settlement does not say anything, the custodial parent – the parent who has primary guardianship – gets to claim the exemption. Note that while exemptions can be negotiated, child-care credits cannot. Only the custodial parent can take child-care credits.
Income and estimated tax payments. After a divorce, your income stream many be different from when you were married, especially if you get alimony and child support. There were changes to taxation of child support and alimony for divorces after 2018. Child support is non-taxable, as is alimony, at the federal level. Payments made for child support and alimony are also no longer deductible from taxable income by the payor. State tax treatment of alimony varies, so ask an experienced attorney about possibly revising your estimated state tax payments.
Dividing investments and asset allocation. Once your investments are divided, and you have your assets, you need a comprehensive understanding of your portfolio and the resulting tax implications if you make changes to your investment strategy. When reviewing investments, consider what you have saved for retirement.
Estate Planning. Once the divorce is final and the assets are divided, it is important to review and update all beneficiary designations and estate plans to ensure you are not inadvertently leaving assets to an ex-spouse. You may also have obligations to leave certain assets to or for the benefit of minor children, and if you fail to do so, you may be in violation of your divorce agreement. Be sure to seek appropriate estate planning counsel to verify you are meeting all your obligations and desires.
Reference: Kiplinger (Feb. 10, 2022) “What Women Should Know about Post-Divorce Tax Planning”
Suggested Key Terms: Tax Planning, Financial Planning, Divorce