Divorce is stressful, but understanding the rules can save you tax dollars. Here are ten tips:
- Child Support: Payments are not tax-deductible for the payer and are not taxable income to the recipient. They are tax-neutral.
- Alimony: To be deductible by the payer and taxable to the recipient, payments must meet specific criteria (cash, written agreement, end at death, etc.).
- Exemptions: The custodial parent (who has the child for the greater part of the year) generally claims the child as a dependent unless they sign Form 8332 releasing the claim to the non-custodial parent.
- Medical Expenses: A child's medical expenses can be deducted by keeping track of who actually pays them, regardless of who claims the dependency exemption.
- Filing Status: If you are still legally married on Dec 31, you must file as Married Filing Jointly or Married Filing Separately. You cannot file as Single. You might qualify for Head of Household if you lived apart for the last 6 months.
- Property Transfers: Transfers of property between spouses incident to divorce are generally tax-free (Section 1041). The recipient takes the payer's basis.
- Legal Fees: Fees paid for tax advice or to produce/collect taxable alimony are deductible (subject to the 2% floor). Fees for the divorce itself are not.
- Retirement Accounts: Use a Qualified Domestic Relations Order (QDRO) to split retirement plans without incurring early withdrawal penalties.
- Name Change: If you change your name, notify the Social Security Administration immediately to avoid IRS matching errors.
- Withholding: Update your Form W-4 with your employer to reflect your new status and exemptions.