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Tax planning may save money after divorce

| Oct 21, 2020 | Divorce

When you are in the midst of a divorce, tax planning may not have a high priority on your to-do list. 

However, Kiplinger explains that planning may reduce the taxes you owe after divorce. 

The date of divorce affects your filing status

Your marital status as of the last day of the year dictates your tax filing status. If your divorce is final as of December 31, you can file as a single taxpayer. 

If you and your partner separated but did not finalize your divorce by December 31, you may save money by filing a joint return. You may also choose to file separately as a married couple. 

Whether or not your divorce is final, you may have the option to file as head of household if you meet certain conditions. This filing status may lower your tax bracket and let you take a larger standard deduction. 

You may qualify for the child tax credit

The parent with primary custody may claim a tax credit up to $2,000 for each qualifying child. The custodial parent may also get a credit up to $500 for each other qualifying dependent. If the noncustodial parent is in a higher tax bracket, you and your co-parent may agree that the noncustodial parent should instead claim this credit. 

You may realize tax benefits from the sale of assets

You and your partner may sell the family home when you divorce. You may each qualify to exclude the first $250,000 of any gain from taxes. To qualify, you must have owned your home and lived there for at least two years during the previous five years. If you do not meet this test, you may still benefit from a reduced exclusion. 

If you transfer the house, stocks or other property to one spouse, the transfer is not taxable. However, a property’s tax basis follows the asset, so all appreciation is subject to capital gains tax. 

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