Everyone knows that getting divorced takes a toll on your financial stability. What if you could use the divorce to your benefit, particularly as it pertains to taxes?
This blog will discuss tax benefits of a divorce
First you want to ensure you get to claim your child or children every year or at a minimum every other year. If you have more than one child you could each claim one child and even alternate claiming the third child. This isn’t something you should give up lightly in a divorce. The IRS guidelines state that the primary parent claims the children, but this is always negotiable in a divorce. You will want to claim head of household and use the children as your deductions. With this scenario, you will be able to claim the children as deductions and also receive child tax credits. With the head of household deduction, you will also be able to clay your child's daycare expenses. You will wish to ensure that the language of your parenting plan requires the other party to sign IRS form 8832 every year you are claiming the children, in order to comply with IRS rules.
Secondly, you will also want to ensure you claim the deductions pertaining to the marital home. If you pay any amount toward the home or still have an ownership interest in the home, you should be able to claim the deductions on the 1099 form submitted by your mortgage company. This includes payments for mortgage interest, real estate taxes and homeowner’s insurance. This deduction can be significant, especially in the early years of your mortgage when 90% of your mortgage payment is interest.
Thirdly, it always it benefits you to file jointly with your spouse, if still married, rather than each filing separate tax returns. However, you cannot file jointly if you are divorced before the end of the calendar year. If you reach a divorce agreement near the end of the year, you may wish to hold on to the paperwork, and not enter the divorce decree until after the first of the year which will enable you to file jointly and be able to claim all of the marital deductions.
Finally, most divorce settlements involve a cash payment from one party to the other. You want to ensure the money you are receiving is tax-free money. This could be spousal support payments, which since the laws changed in 2019, is no longer taxable. Home equity buy-outs are not taxable either. If you have equity in your home and the other party is retaining the home, you are entitled to a buy-out of your equity, 100% of which is tax-free. Generally, the only cash payment in a divorce that will be taxable is retirement transfers, and then only if you remove the money from the account. Money can be transferred from one retirement account to the other as part of a divorce with no tax consequences. This is done through a document called a qualified domestic relations order or qdro for short.