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Divorce and Taxes - some facts must know about taxes
Getting divorced? You have a lot going on. In fact, when you divorce, nearly every vertical of your life changes — including your taxes.
If your marriage is ending, address these tax concerns now. Below are the nuts and bolts of divorce and tax law. But if you are currently negotiating your split, or have a open dialogue with your ex, sit down with a tax professional to explore arrangements that could reduce the tax burden for both of you.
If you were still legally married on Dec. 31, 2014, you can still file jointly with your soon-to-be ex. If you divorced during 2014 and you have agreed with your ex to claim any children as dependents, or they lived with you for more than half the year, you can file as single head of household, which allows you a bigger tax break.
Who claims the kids.
If the kids lived with you more than half the year, you claim them. However, regardless of your custody arrangement, you and your ex can agree out of court who claims the children as dependents. If the higher-earner makes too much (if they qualify to pay the Alternative Minimum Tax), he or she can allow the other parent to claim the kids, at $3,950 per child for tax year 2014.
Typically, the parent who pays for the child’s medical expenses can claim those bills.
Don’t get too excited if you win alimony. You’re the one who has to pay taxes on that income. If you’re the one paying your ex alimony, that is a tax deduction for you. These tax implications are only applicable unless they are detailed in the signed divorce agreement.
The payor pays taxes on this income.
If you withdraw funds from your 401(k) and give them to your ex, you face early withdrawal penalties and that sum is considered taxable income. However if you transfer that money under a Qualified Domestic Relations Order (QDRO), both of you avoid this tax trap.
Capital gains on a home.
Single filers can shelter $250,000 profits on the sale of a primary residence, while married couples, filing-jointly, can avoid taxes on up to $500,000. If you stand to profit above either of these thresholds, consider timing your divorce and the home sale accordingly. Similarly, those tax breaks only apply if you have lived in the home at least two of the past five years.
The spouse who gets ownership the house in the split also claims the mortgage interest deductions — regardless of who lives in the home or who makes the mortgage payments. If one spouse lives there but both continue to jointly own it, then both parties split the mortgage interest deduction.