You’re running out of time to file! It happens. You waited and waited and now, you’re in a panic. Before you freak out, take a breath and remember that you’re not alone. Think it through, then read these tax tips for divorced filers.
Tax Tips Start With Filing Status
Before you check the box to file as Single, consider whether you can claim Head of Household as your filing status.
Head of Household is possibly the least-understood but most valuable option for filing status.
With it, you’ll get a lower tax rate and a higher standard deduction. To qualify as Head of Household, you must meet all of the following criteria:
- Be unmarried or considered unmarried on the last day of the tax year
- A qualifying person must have lived in your home for more than half the year. Your child is a qualifying person even if you can’t take the dependency exemption for that child.
- You must have paid more than half the cost of keeping up your home for the year
- You must be a U.S. Citizen or resident alien for the entire tax year
If your filing status isn’t clear cut, check out this interactive IRS tool to help you determine your filing status after a divorce.
If your divorce was not yet final as of December 31st, you may be better off filing jointly with your ex since choosing to file Married Filing Separately forfeits a number of deductions and tax credits.
If you do file jointly, be sure to review the tax return before you sign. The IRS will hold you liable for what is being reported, whether your spouse or a professional accountant prepared the return.
Child Support & Alimony Tax Tips
Child support payments are never deductible for the parent paying the support and not taxable income to the parent receiving the support.
Alimony is a taxable income to the spouse that receives it and a deduction for the one paying it. This difference in tax treatment often leads to the person making the payments wanting to classify them as alimony while the recipients want to call it child support.
This difference in tax treatment often leads to the person making the payments wanting to classify them as alimony while the recipients want to call it child support.
If your payments are allocated between alimony and child support, take a look at this article to help you decide which is which.
As a general rule, the custodial parent (the one the child lives with most of the year) claims the child as a dependent on their tax return. The non-custodial parent can claim the child as a dependent if the other parent signs a waiver agreeing not to claim the same child on his or her return. Form 8332 must accompany the noncustodial parent’s return each year he or she claims the child as a dependent.
For 2016, each dependency exemption will reduce your taxable income by $4,050. You’ll also be eligible for other valuable tax breaks such as the Child and Dependent Care Credit, the Child Tax Credit, and other tax benefits for higher education
Deducting Medical Expenses
If you continue to pay your child’s medical expenses after the divorce, our tax tips for you is that you can include those costs in your medical expense deduction, even if your ex-spouse claims the dependency exemption.
Medical expenses are deductible as itemized deductions on Schedule A, only to the extent that they exceed 10% of your Adjusted Gross Income.
Legal Fees and Taxes
Most legal fees associated with a divorce are considered non-deductible personal expenses, but here’s a special tax tip for you: To the extent your lawyer’s work focused on tax issues such as alimony, dependency exemptions, or the implications of asset transfers between spouses, that portion is deductible as a miscellaneous itemized deduction.
To take advantage of this deduction, have your attorney break out an itemize the tax-related advice portion of the bill from the personal part.
Miscellaneous itemized expenses (which also include tax preparation fees, safe deposit box fees, investment and job-related expenses) are only deductible when they exceed 2% of your Adjusted Gross Income.
Asset Transfers Can Be Tricky
When assets are transferred as part of a divorce settlement agreement, the recipient doesn’t have to pay taxes on the transfer.
Were assets awarded to you in the divorce? Good for you, but pay attention to these tax tips about assets. If you decide to sell that property later, you’ll have to pay capital gains tax on all of the appreciation before, as well as after, that transfer.
If the asset in question is your primary residence, you are in luck. The IRS allows a single taxpayer to exclude up to $250,000 in gains on a home that served as your primary residence for two out of the last five years.
Capital gains taxes complicate the division of assets during a divorce. It may seem equitable to allocate $500,000 in cash to one spouse and a property valued at $500,000 to the other spouse, but if the property generates capital gains when sold, the property will actually be worth less than the cash.
Filing taxes after a divorce may be even more complicated than when you were filing together. Fortunately, the IRS has several resources online to help taxpayers navigate complex issues. Publication 504 is a general reference for divorce issues including alimony, filing status, retirement, property settlements, exemptions, and legal fees. Publication 503 discusses child and dependent care expenses.
When You Need More Time
The 2017 tax deadline for filing 2016 taxes is April 18th. You haven’t missed it yet, but if that’s not enough, you can file for a six-month extension.
Remember that the extension is an extension of time to file your return, not to pay your tax bill. If you owe money, you’ll need to pay with the extension to avoid late payment penalties and interest.
If you owe money but can’t afford to pay right now, file an extension anyway. The late filing penalty can be ten times more than the late payment penalty.
If you are due a refund, you won’t be penalized for filing late, but you won’t be able to get your refund until you file. If you are a few years behind, it might be a good idea to get your 2013 return filed right away. You have three years from the original filing deadline to file and still receive your refund. If your 2013 return has not been filed by April 18, 2017, your refund becomes the property of the U.S. Treasury.
Tax season is generally not a favorite time of year for most people, but it can be a particularly rough time if you are newly divorced or separated. Still, ignoring income taxes won’t make them go away. If you owe money but don’t make some effort to file your returns and pay the tax due, the IRS has broad powers to collect, including filing liens, levying bank accounts, and even garnishing your wages. The IRS could even decide to launch a criminal investigation.
The IRS is generally willing to work with people who respond to notices and demonstrate they are making an effort to get compliant. If circumstances beyond your control, such as health problems or other financial difficulties, prevent you from paying the tax owed, the IRS may label your account ‘currently not collectible’ and delay collection actions until your financial situation improves. This won’t reduce your debt, but it will delay collection activity until you are able to work out a payment arrangement.
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