How to 'Consciously Uncouple' Your Taxes

Before you go, we thought you'd like these...
People Gwyneth Paltrow Chris Martin
Colin Young-Wolff, Invision/APIn happier days: Gwyneth Paltrow and Chris Martin.
By Lauren Young

"Conscious uncoupling" might become all the rage now that actress Gwyneth Paltrow and musician Chris Martin have announced they are separating in a cooperative and respectful way. But there is nothing touchy-feely about divorce in the eyes of the Internal Revenue Service.

In fact, filing taxes after you divorce, or even separate, may be trickier than when you were together. And, as if to add insult to the emotional injury of ending a marriage, your first "uncoupled" tax bill might deliver a major financial blow.

That's because receiving alimony, dividing up property and other assets "can become complicated very quickly," says Michelle Crosby, co-founder and chief executive officer of Wevorce, an online, fee-based service to help couples divorce amicably.

"The biggest taxable events are not necessarily part of the divorce process, but play out afterward," adds Roy Nelson, who holds the lofty title of fiscal architect in addition to certified public accountant at Wevorce.

I got divorced last year after 10 years of marriage. My ex- and I always did our taxes together. As a new member of the First Wives Club, I treated this year's tax return as my own personal finance experiment using software from TurboTax, which is a unit of Intuit.

Here is what I learned:

Who Claims the Kids?

Be careful about who claims the children as dependents to get a valuable tax deduction. Prior to 2009, you could specify in a divorce decree which parent could claim the dependency exemption.

But you can no longer use a divorce settlement agreement to back up your claim of dependency. Instead, you have to use IRS Form 8332, eloquently titled "Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent," and it must be signed by the custodial parent for use by the non-custodial parent.

%VIRTUAL-article-sponsoredlinks%The tax implications are significant: for each dependent, you can deduct $3,900 from your federal taxable income, which is likely to reduce your taxes. (As a reminder, a tax deduction is something that reduces the taxable income you claim on your return. A tax credit directly cuts how much tax you owe.)

Each qualifying child must live with you more than half of the year and be under the age of 19 at year-end. This exemption also applies if your child is under 24 and a full-time student for the year -- defined as attending school for at least part of five calendar months during the year.

Some parents alternate who gets to claim dependency from year to year. For me and my ex, this one was a no-brainer. While married, our combined salaries pushed us into a parallel tax universe that required us to pay the dreaded Alternative Minimum Tax, or AMT, eliminating many valuable breaks such as the dependency exemption.

Post-divorce, my ex-husband still has a hefty AMT tab to pay. Since I'm only taxed on my salary (insert journalist joke here), it makes sense for me to claim our kid as a dependent.

Score one for the divorced mom.

What's Your Filing Status?

Here's something that almost tripped me up. I assumed my former spouse and I would file taxes together because we were married for part of 2013. I didn't realize that your marital status at the end of the year determines how you file your tax return.

"If you're divorced on Dec. 31, you're considered single," says Lisa Greene-Lewis, a certified public accountant at TurboTax. You can still file as a couple, even if you are not living together, but that doesn't always make financial sense.

For example, one spouse may be able to claim head of household, which can result in a bigger tax savings. To qualify, you have to live apart for the last six months. You also have to pay more than half of the costs to support the household. The other spouse would file as a single taxpayer.

Alimony and Child Support

Some people think they've scored a big win when they get their ex to cough up alimony. But keep in mind that alimony is taxable to the recipient.

That's often a big shock when couples untangle. "Even if you don't feel like you have as much money, you could see a tax jump with a filing status change after the divorce," Wevorce's Nelson says.

The person who pays alimony, though, gets to deduct it. Child support, by contrast, is not taxable to the recipient, and it's not deductible for the person paying it.

Division of Assets

Remember the movie "The War of the Roses," in which a house literally destroys a marriage? Well, your matrimonial home can also decimate your tax bill if you decide to sell it.

That's because married couples can realize up to a $500,000 gain on their principal residence. "But now that you're single, it's cut in half" to $250,000, says TurboTax's Greene-Lewis.

On the flip side, the person who retains the home may be use one of the most popular tax credits -- the mortgage interest deduction. Part of your monthly mortgage payment goes to pay down the principal on the loan and part of it covers the interest you pay on the mortgage. In general, that mortgage interest is tax deductible.

In short, because people's financial situations are so unique, divorce may or may not work in your favor when it comes to the tax bill. "Some people are really happy and some people are not so happy," says Nelson.

As for me, I'm in the happy camp. For the first time in 10 years, I'm getting a refund.

9 PHOTOS
7 Most-Missed Tax Deductions and Credits
See Gallery
How to 'Consciously Uncouple' Your Taxes

Taxpayers may forget that donations they gave last year may get them a bigger refund. If you cleaned out your bulging closet and dropped off clothing or household goods at your favorite charity, this may be deductible on your tax return.

Taxpayers taking a full course load and working toward a degree can receive education benefits through the American Opportunity Tax Credit for college expenses. But even those who just took one class to further their career may be able to take the tuition and fees deduction. With this credit, you can deduct up to $4,000 for tuition and fees, books and educational supplies for you, your spouse or your dependents.

Taxpayers can deduct state income taxes, but what about residents of states that don't have a state income tax? In this case, the state and local sales tax deduction is especially useful because these taxpayers can deduct sales tax paid on purchases. Even people who live in states that pay state income tax can benefit if they paid more sales tax due to large purchases.

The earned income tax credit is a refundable tax credit given to filers who earn low to moderate income from their jobs. The credit can be worth up to $6,044, depending on your income and how many dependents you have, but one in five tax filers overlook this opportunity, according to the Internal Revenue Service. You must file your taxes to get it, so even if you make less than $10,000 (the minimum income filing requirement), you should still file your taxes.

If you were looking for a job last year, you may be able to deduct costs related to your job search -- even if you didn't secure a job. Job search expenses such as preparing and sending resumes, fees to placement agencies and even travel related to the job search can be included.

This credit is often overlooked and seldom talked about. If you have an income up to $29,500 ($59,000 for married filing jointly), you can save for retirement and get a tax credit worth up to $1,000 for individuals and $2,000 for couples if you contributed to a qualifying retirement plan such as an individual retirement account or 401(k). The retirement saver's tax credit is a win-win situation since contributions to your IRA may also be a deduction from income.

Taxpayers who weren't so lucky gambling last year should know that losses can be deducted if they itemize their deductions. However, your amount of losses cannot surpass your winnings, which must be reported as taxable income. For example, if you have $2,000 in winnings and $4,000 in losses, your deduction is limited to $2,000. Make sure to collect documentation such as receipts, tickets and other records to support your losses.

of
SEE ALL
BACK TO SLIDE
SHOW CAPTION +
HIDE CAPTION
Read Full Story

People are Reading