6 Tips for Preparing Your Taxes in a Divorce
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Taxes are understandably low on the list of things people worry about when they’re getting divorced, but ignoring Uncle Sam can be an expensive mistake. Here are six things you should consider to avoid a tax surprise when the rings come off.
1. Check the calendar
For tax purposes, your marriage status on Dec. 31 is usually your marriage status for the whole year, notes Paul Joseph, a certified public accountant and attorney in Williamston, Michigan. So if you expect your tax bill to go up after your divorce, and you’re not prepared for that yet, consider waiting until Jan. 1 to make things official. A tax pro can help you run before-and-after scenarios.
2. Start gathering account statements
You’ll need them to inventory your assets and liabilities, as well as to determine whose names are on the accounts. Gather information on your home, cars, loans/debts, as well as banking, investment and retirement accounts.
3. Hire pros
Consider which professionals (e.g., lawyers, accountants, real estate agents) you may need to hire or work with throughout the process.
Another option is to search the Institute for Divorce Financial Analysts website for professionals who carry the Certified Divorce Financial Analyst designation.
4. Make a plan for the house
If you’re selling the house, it might be better to do it while you’re still hitched, says Chicago-based attorney Tony Madonia. That’s because the IRS exempts the first $500,000 of gains on the sale of a primary home if you’re married filing jointly, but for single filers, the exemption is only $250,000. That exemption generally applies only to a primary residence, not second homes or rental properties.
Generally, you need to have lived in the house for two of the last five years. For example, if you originally paid $200,000 for your house, and it’s now worth $700,000, selling it while you’re married could keep that $500,000 gain tax-free. Sell it when you’re single, however, and suddenly $250,000 of your gain could be taxable.
5. Factor in the tax effects of the kids
Generally, a parent with whom a child lives at least half the year and who provides at least half of the child’s support can take the child tax credit and other related deductions and credits if the parent is eligible. The parent might also be able to use the head of household tax filing status, which has its own advantages.
6. Mind the tax hit when splitting assets
From a tax perspective, getting $100,000 of cash in a divorce settlement can be very different than getting $100,000 in stocks, Joseph warns. That’s because, for the stocks, you might have to pay capital gains tax later on, the difference between your basis — typically, what you paid for the shares — and what you sell them for.
Similarly, low-basis investments could generate more capital gains taxes than high-basis investments. For example, if you get a stock portfolio worth $100,000 in the settlement, you might pay more capital gains tax if the stocks originally cost $25,000 than if they cost $95,000.
