Timing your divorce right can save you a lot of taxes. The formula is the exact opposite of when you get married. If both spouses earn about the same amount of money, getting a divorce before the year ends will save taxes by eliminating the marriage penalty. If one spouse earns a lot more than the other, waiting until January will save taxes by taking advantage of the marriage bonus for one last year.
Always get good legal advice when determining the division of property, alimony, and child support. You are not going to save any money by doing it yourself. Having said that, a lot of attorneys don't pay enough attention to the tax considerations of divorce, so it would be wise to also consult your CPA.
If you are the non-custodial parent and want to claim your child as a dependent, get Form 8332 signed before the divorce is finalized.
The custodial parent has the right to claim the child as a dependent unless that right is released to the noncustodial parent. If released, the waiver needs to be in writing, signed, and attached to the noncustodial parent's return. The waiver can be for one year, permanent, or any other way you want to do it. Form 8332 is the official IRS waiver, but you can also write up your own waiver and use it as long as it spells out who gets the deduction and is signed by the custodial parent. One item to note is that the custodial parent still has the right to claim Head of Household status, the Earned Income Credit, and Dependent Care Credit even though they have released the right to claim the child as a dependent. However, if waived, the noncustodial parent claims the $1,000 child tax credit along with the dependency exemption.
If you are in a higher tax bracket than your ex-spouse, modifying agreements to recharacterize payments as alimony would bring tax savings that could be shared by both parties. Child support is nondeductible by the payor, and is not included in the taxable income of the recipient. Alimony is the exact opposite, the payor deducts the alimony payment, and the recipient includes the alimony as income on his or her tax return.
If a taxpayer must make all the mortgage payments on a jointly owned home, he or she may be able to deduct one-half of the total payments as alimony and the other half on Schedule A as an itemized deduction. The same is true for real estate taxes and insurance paid on the home. You get a better deal deducting the expense as alimony rather than on Schedule A.
If you are legally required to pay any medical expenses for your ex-spouse, deduct the expenses as alimony instead of on Schedule A as an itemized deduction.
If you do not have custody of your child, you can still deduct your child's medical expenses on your tax return if you are the one that pays the medical expenses.
If one spouse is in a lower tax bracket, it saves overall taxes to transfer appreciated property to the lower tax bracket spouse when doing the property settlement.
Basis of property received in divorce settlement. The cost basis and holding period of property you receive from an ex-spouse in a divorce settlement is the same basis and holding period your ex-spouse had. For example, if your ex-spouse bought 50 shares of XYZ Corp for $4,700 on January 10, 2014 and you receive those 50 shares as part of the divorce settlement, your cost basis in the XYZ stock is $4,700 and the date acquired for the stock is January 10, 2014, not the date you received the stock as part of the divorce settlement.
If you pay child support, it is not deductible on your tax return. If you receive child support, it is not taxable income and does not need to be reported on your tax return. If you receive both alimony and child support and during the year you receive less than the amounts required, then the amounts received are first applied to child support. If the full amount of child support is received then any excess would be considered alimony and would be taxable as alimony income on your tax return.
Alimony payments are deductible if the following requirements are met: (1) the payments are in cash, checks or money orders (2) required by a divorce or separation instrument, (3) the payments are not for child support, (4) the payments are not part of the property settlement payments related to the divorce, (5) you and your (ex) spouse must not be members of the same household and do not file a joint tax return, and (6) you are not liable to make any payments for any period after the death of your (ex) spouse.
One item to note is that if you owe both alimony and child support and during the year you pay less than the amounts required, then the amounts paid are first applied to your child support obligation before being applied to alimony.