Getting a Divorce? Don’t Overlook Tax Planning

Doing your taxes can be a daunting task at any time but at times it can be even more stressful when there is an impending divorce. But the choices you make will affect you both financially and personally. There are a few ways a divorce can affect your tax planning.

* Asset transfers. In general, ex-spouses can make a tax-free transfer of assets within a year of the divorce. “Tax-free” means the initial transfer is considered a gift, so you’ll want to make sure you’re fully informed about the basis of assets you receive. This will be important when you sell the assets later. Why, you ask? Because you get the same basis and holding period your ex-spouse had before the transfer.

* Some types of property, such as retirement plans, have extra rules to be aware of. For example, to remain tax-free, a transfer from your traditional IRA to your spouse must be mentioned in your divorce decree, and should take place post-divorce, via a direct transfer to the new account.

* Splitting assets in your 401(k) or other qualified retirement plan requires a “qualified domestic relations order,” a document you must get from the court.

* Filing status. The timing of your divorce matters for tax purposes. The date of your final decree determines your filing status, which in turn has an impact on what you’ll owe.

Will your divorce be final by December 31^st, the last day of the tax year? If it is, you will file your tax return as single or head of household.  If you were legally separated by the laws of your state, at the end of the year, you can also use one of these filing statuses when you do your taxes.

You will be considered married for the year if your divorce is not final by the end of the year. Your filing choices will then be, married filing jointly and married filing separately or in certain situations, head of household status may be an option.

TIP: Don’t forget to adjust your income tax withholding on file with your employer.

* Exemptions. When preparing your federal income tax return for 2013, you can deduct $3,900 for each qualified child or relative that you claim. In addition, you get the benefit of other credits and deductions related to your dependent, such as the child tax credit.

The general rule: You’re the custodial parent if you’re the one your child lives with for the majority of the year. You can release your claim to the exemption by filing a form with your return. The release will also allow your former spouse to claim the child tax credit.

Tip: Consider adjusted gross income and your exposure to the alternative minimum tax when discussing who will get dependency exemptions.

For more tax tips contact our office at (260) 497-9761 to schedule an appointment with our Tax Advisors.