As I write this note, it’s late, and I am watching my son finish a social studies project that is due tomorrow morning. As is typical with many kids, he had plenty of time to get this project done, but he waited until the last minute. As Little Orphan Annie reminded us, “tomorrow” is full of hope and promise, but tomorrow is also the best friend of procrastination.
Deadlines are often a useful tool for procrastinators to start moving. When it comes to taxes, however, the deadline of April 15 (or April 18 this year) can be misleading. I was reminded recently by an advisor that the real deadline for good financial and tax planning is December 31. By meeting with your advisors early, and asking the right questions, you can learn how setting up certain structures, like a corporation or a private pension, may result in lowering, or in some cases even eliminating, taxes the following year.
While financial and tax planning is especially important for small business owners, another group that needs to pay special attention to planning are those going through a divorce. This week’s article has some good information for those people. December 31 may seem like a long time from now, but it will be here before you know it. Take action today, not “tomorrow”!
Recently Divorced? Here’s Why You Should Put Aside Your Differences Come Tax Season
Divorce can wreak havoc on your finances. But what many divorced couples don’t realize is that they can expect to face recurring financial challenges during tax season for years after the divorce is finalized. While divorce is often adversarial, leaving both spouses with animosity in its wake, tax season is an opportune time to put aside those differences and cooperate to reach a mutually beneficial outcome.
Filing taxes in the midst and even after divorce can be complicated. Even after a divorce, many couples retain financial ties in the form of ongoing support, shared assets, lingering retirement plan divisions, and tax breaks, all of which can significantly affect tax liability. You can avoid another bitter battle by sitting down with your ex-spouse—and ideally a trusted lawyer—to discuss a few key issues.
Will You File Jointly or Individually?
Couples in the midst of a divorce can file “married filing jointly” or “married filing separately.” Each filing status has its pros and cons, so you should only make this decision after consulting with a lawyer and a tax advisor.
Couples with a divorce finalized before the New Year have to file separately, so consider delaying the finalization of your divorce until after December 31st if you’d like to reap the benefits of filing as a married couple.
Whatever you do, don’t wait until tax season to decide how to file, and don’t decide without consulting with your spouse. Coordinating your filing status can be advantageous to both parties if you plan ahead.
Who Claims the Children?
This is another important issue worth determining before tax season. Typically, the divorce judgment will include a stipulation on who gets to claim the children and the associated credits or deductions. Many couples choose to take turns by alternating years or each claiming one (or more) child individually . But if you don’t already have this determined in a court order, you might need help determining which parent has the most to gain one way or the other. In general, primary custodial parents have the right to claim the children, however in the case of shared custody, that right can fall in either direction. Likewise, divorcing couples that are filing separately will need to make this decision, but it is best first to figure out whom the claim will benefit the most before you decide.
How Will You Handle Dividing Your Assets?
Not all types of property divisions are tax friendly. Make sure you consult with a lawyer before you put your property division in writing to ensure the spouse who receives the assets is not met with an undue tax burden come tax season. This is more of concern for couples in the midst of a divorce, but divorced couples can run into issues about jointly held assets (such as the family home), too. And failing to include a stipulation regarding jointly owned assets in the judgment can create trouble.
The spouse who retains residence of the family home doesn’t necessarily get to claim all the tax benefits, especially if he or she is not financially responsible for the home. Cooperation is essential in this matter. The division of retirement accounts can also affect your taxes. Make sure you file a Qualified Domestic Relations Order to divide plans without penalty. Liquidating the accounts to divide them will result in penalties and a higher tax liability.
How Will You Characterize Support?
Orders for alimony (also called spousal support or spousal maintenance) and child support are common in many divorces. Child support has no bearing on tax liability and cannot be deducted. Alimony, however, is a little more flexible. Alimony is typically taxed as income to the
receiving spouse and a deduction for the paying spouse, but the wording in your judgment can affect this. Work with a lawyer before you finalize your divorce to ensure your alimony order will be mutually beneficial to you and your spouse.
If you’re divorced and need financial guidance, consider sitting down with us. As your Personal Family Lawyer®, we can help you strategize your tax filing for maximum benefit this tax season.
We don’t just draft documents, we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love.
You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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