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Facts About Divorce 1026181155 Jul 24 2012 600x398

3 Tax Warnings (and Tips) For The Newly Divorced

Divorce can be rough and if you’ve been through one then you know that it means an upheaval of every area of your life which makes the transition that much harder.  I’ll preface this by reminding you that I am not a CFP or a CPA and you must consult with the local and federal laws as they relate to your situation.  For more information, you can check out  Publication 504 from the IRS.

Now that we have that out of the way, let’s chat.

When I got divorced the last thing on my mind was taxes. But it was something that I needed to handle because I had no intentions of allowing that financial cloud to linger.  And, honestly, I stuck my head in the sand for a while because I didn’t want to deal with it.  When I exited my marriage, I made sure that we no longer shared any major accounts that would be of major consequence to my financial well being.  I had concerns in that area and it was best to cut ties instead of continuing on based on well intentioned trust.

So now we’re on to the lovely area of taxes.  After doing some research and talking with an accountant here’s the breakdown:

Claiming The Right Filing Status Post Divorce

I originally thought that I’d be able to file married filing jointly in the following tax year but no dice.  Uncle Sam says that my tax filing status is determined by my marital status on the last day of the year.  And of course, this sucks for me because I lose out on the married folks tax deduction.

Child Support vs Alimony

We had no children but I wanted to cover this area for those of you that do have children.  Child support is not taxable income, however, alimony is taxable so keep that in mind whether you’re paying or receiving alimony.  If you’re paying alimony, do yourself a favor and keep good records of each payment.  You’ll need this during tax season and you’ll want to make certain that you deduct it on your tax return.  Receiving alimony?  Add this to your list of income sources on your tax return to avoid any potential issues with the IRS.

If you’re on good terms with your ex or soon to be ex, try to sit down with a CPA who specializes in taxes post divorce to work out an agreement that minimizes your tax liability depending on what end you sit on in this situation.

Old Taxes Owed Jointly

These don’t go away or get wiped out in a divorce.  In other words, you don’t divorce any joint taxes owed, you still owe them and must make sure they are paid.  If one of you falls behind on making payments, then both are held jointly liable and you really want to avoid this from happening.  Talk to the IRS before falling behind to understand your options.  The last thing you want is to pop up on their radar for delinquent tax payments.  This is why it’s important to get things in writing, especially in the separation agreement.  If one of you agreed to pay back taxes then make sure that they stick to the agreement.  If not, pay the amount owed and then consider your options in civil court but Uncle Sam wants his money and doesn’t care who pays it.

Tips To Get Through This Time

Get on the same page.  If at all possible, try to get on the same page around any final financial agreements with your ex or soon to be ex.  Sometimes it’s best to let cooler heads prevail by taking a time out or hiring a mediator to work out the finer details.  Regardless of how you get there, in the end, getting on the same page with them helps the two of you navigate the future (co-parenting, owning property together etc).

Get It All In Writing

This is a must.  Amnesia happens (intentionally and unintentionally) and it’s best to have things in writing to support your position.  This helps you avoid volatile arguments and keeps emotions running at a minimum when things are written in black and white.

Avoid Making Emotional Decisions about Money

This is tempting and I’ll tell you why.  When I was done I wanted out and nothing to do with much of anything around money.  I wanted to separate myself in every way possible.  I’d written the separation agreement to that effect and then my girlfriend stopped me from a major financial mistake.  Looking back I am really happy she made me pump my brakes because I was ready to make an emotional decision with potentially regrettable consequences.

As you can imagine, divorce is rough and you’ll be tempted to make emotional decisions and/or stick your head in the sand until you feel like dealing again.  This may or may not be OK depending on what you’re dealing with at the time.  Still, take a step back and reflect on your future.  Ask yourself with each decision – is this the best decision for me (and my children if applicable)?  If it isn’t, go back to the drawing board and map out a plan that takes everything into consideration.

 

 

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