Getting a divorce can be an emotionally draining process. But it doesn’t have to be a financially draining procedure as well. Here’s how you can save on taxes as you go through your divorce settlement :
What to keep in mind while making alimony payment :
Alimony is the amount of money that a person has to pay to an ex spouse as part of the divorce decree. There are a number of factors which determine the amount of money a person has to pay, and depending on the financial condition of the spouses, there may not be alimony as decided by the judge.
After Tax Cuts and Jobs Act of 2017, money paid in alimony after the year 2018 is no longer deductible by the paying spouse. It is also not considered taxable income for the spouse receiving alimony.
Property is often transferred amidst spouses as part of a divorce settlement. A vehicle or a property may be transferred from one spouse to the other so that the two can get an equal share of joint property which they together acquired during the period of their marriage
Usually, a marital property settlement is not considered taxable if the transfer is made due to the divorce. The property transfer is only considered as an incident of th3 divorce if it happens within the period of one year after the marriage ended.
Change in marital status:
During the time a couple was married, the two had the choice of filing joint or separate income tax returns. After the divorce, these filing statuses would no longer be available to either of the spouses. You would only be eligible to file as single, or as a household head in case you have qualifying dependents.
The change in marital status can possibly change your tax bracket. If you had a working spouse coupled with a stay at home spouse, the couple fell under a lower tax bracket. But after their divorce, the earning spouse ends up in a higher tax bracket and could owe more in taxes since they don’t get the same tax exemption as before.
It is important to remember that opting for a divorce will not end your tax liability towards the divorce agreement and in case of transfer of assets. The IRS is likely to randomly audit the tax returns of a divorced couple for upto three years, which could be extended to seven years if the IRS has cause.