taxes

Taxes and divorce

Monday March 1, 2010
Posted 11 a.m. EDT

My mother loves golf. My husband is a very good player and actually has a job that's connected to the sport.

So my mom is always telling me I need to learn how to play so the hubby and I can hit the links together. And I'm always replying, "If you want me to get a divorce, Mom, just say so, because that's what would happen if we tried to play golf together."

Tiger Woods
I've been replaying that mother-daughter exchange recently in the wake of Tiger Woods' marital troubles. No, I don't think Elin being on every fairway with Tiger would have made much difference, for better or worse if you'll excuse the phrase, in their relationship. But I have been wondering if this young couple will be able to keep their marriage together.

As a wife, part of me hopes the golf club whacking of Tiger's Escalade story is true. But another part of me, as someone who's been married for almost 30 years, hopes that they find a way to make their marriage work.

However, I am a realist. They might not make it. And, being a tax geek, that possibility has me thinking about the tax considerations of divorce. Not just the splits of rich and famous sports figures, but us everyday folks.

If you and your spouse are considering divorce, here are some tax tips you might want to keep in mind.

Decide who will get the children's tax exemptions

Kids are a major concern, both tax and personal, for divorcing parents. When it comes to taxes, the filing exemption generally goes to the parent who has custody of the child for most of the year. That parent, though, can let the other one claim the exemption. If your split is amicable, talk about how you might want to share this tax break. The law lets you make the ultimate decision and the custodial parent can file a tax exemption release via Form 8332.

Know the rules regarding tax breaks for kids

Speaking of the kiddos, divorce complicates several child-related tax breaks. Residency and support issues come into play for such tax breaks as the child and dependent care credit, the child tax credit, education credits and the Earned Income Tax Credit. Talk with your attorney and/or tax adviser about possible tax-break ramifications of custody agreements. Perhaps you and your ex might want to consider some type of compensation for the spouse who no longer will be able to claim the tax benefits connected to your children.

Use the correct filing status

Although you feel totally alone, for tax purposes you might not be considered single. If you have kids, your more tax advantageous status is likely to be head of household. This offers you a greater standard deduction amount.

Consider filing separately while still legally married

If the breakup drags on, even though you're still officially Mr. and Mrs. you might want to consider sending in two individual 1040s using the married filing separately status. In this case, you each will report only your income, exemptions, credits and deductions.

Be careful though, if you live in a community property state -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Spouses here usually must report half of the "community income" and claim one-half of the "community deductions."

Don't automatically take the house

A couple's residence typically is their most expensive jointly owned asset. In many cases, the ex-wife wants to keep the house so the kids, who typically live with her, can continue to live in the place where they've grown up and stay close to their friends and school. That could cause tax costs down the road. If a couple sells the home before the final divorce decree is issued, they can divide the up to $500,000 in gains that aren't taxed. But if the spouse that ends up as sole owner of the property decides to sell it later, his or her allowable tax-free net profit will be just $250,000.

Understand the tax treatment of support payments

Alimony usually is taxable income to the ex receiving it. The former spouse making the payments can deduct them. Child support, however, is not taxable, either to the spouse receiving it or the children for whom it is supposed to be spent. And child support payments can't be deducted by the paying parent.

Timing is everything

When you're looking to get out of a bad marriage, you probably want to do so as quickly as possible. But acting in haste could cost you tax money. Remember that your filing status is determined by your marital status on the last day of the year. If you're officially on your own on Dec. 31, even if you were legally married the other 364 days of the year, you are single (or head of household) in the eyes of the IRS. But if you're still legally married on Dec. 31, you can file a joint return for that year. Even couples who don't want to be together might find the value of some joint-filing tax benefits make it worthwhile to tough it out a bit longer.

Again, I hope that neither Mr. and Mrs. Eldrick Woods nor you have to think about these tax issues. But just in case, it never hurts to be prepared for taxes in marriage or divorce.

Read more tax blogs.

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