Divorce is already hard enough, and the subject of taxes certainly isn’t going to make it any easier. That being said, it’s still vitally important to understand the subject of paying taxes after divorce, because you’re going to be faced with a number of new issues.
Here are the top tips on prepping for taxes after divorce:
Find Out Your Filing Status
Your marital status has a direct impact on how you file your tax return. If you were divorced before the very end of the tax year, then you will file separately from the spouse.
You’re most likely going to take a tax hit as you split your assets. For example, if you’re getting stocks out of the divorce settlement, you’ll need to pay the capital gains tax on the difference between what you paid for the shares and what you sell them for.
Low basis investments will also create more capital gains taxes over high basis. If your stocks were originally valued at a much lower amount when you bought them then what they are worth now, for instance, you’ll pay a lot more in capital gains taxes.
Alimony and Child Support
Alimony and child support is another huge subject when it comes to taxes and divorce. As of 2018, any payments that are made for child support are not tax deductible. But on the other hand, payments made for alimony are tax deductible for this year.
This changes in 2019, where payments for alimony will no longer be tax deductible as long as the divorce occurs after December 31st, 2018.
For now, the tax deduction for the alimony payment is highly valuable for people who have to pay a higher income tax.
You should also claim the child care credit if you are eligible for it. If you are the custodial parent, and you incur any child care for any children under thirteen years of ages, you can claim a credit for a percentage of the cost.
What About Your House?
Selling your house is another big issue to be concerned about when prepping for taxes for divorce. As a word of advice, it would be wiser to sell the house while you are still legally married.
This is because the IRS will exempt the first five hundred thousand dollars in capital gains on the sale of a home if you are married filing jointly, but for single filers, this amount is halved to two hundred and fifty thousand. This only applies if you have lived in the house for two out of the last five years. This rule only pertains to primary residences, and not to second homes or rental properties.
Be Prepared To Make Estimated Taxes
As long as your withholding is not enough to cover the taxes for the upcoming year, you’ll need to set up quarterly estimated taxes instead. This way, you can avoid taxes and penalties at the conclusion of the upcoming year.
Overall, if you take these tips into consideration, it will benefit you when you file your taxes in this upcoming tax season.