Now that you are single again (or about to be single again), it’s time to take another look at your finances and the tax implications of your choices. The following tips make sure you follow the law and also help you to save money.
Filing a Tax Return
You will need to gather and copy several years’ worth of personal tax returns. If your spouse has a business, you will want to review those business returns even if you didn’t sign them. You need to have access to all information.
File a separate tax return in order to separate yourself from bad decisions your spouse makes. This makes sure you avoid liability if he or she neglects to mention income or expenses on their return. If you did file jointly on previous returns and a problem resulted from those returns, find out about protection under Innocent Spouse Provisions.
A word on head of household deductions: To determine which parent can make certain deductions, keep track of the days and nights your children spend with you versus the other parent.
Alimony is tax deductible, but child support is not. If you receive alimony, you must list it as income on your tax returns too. Remember that alimony must be paid in cash (or check) as opposed to being paid “in-kind” by paying for the other spouse’s expenses. Review some common divorce tax questions.
Taxes and Your Paycheck
As soon as you can begin investing in your 401(k), employee stock option, and other retirement accounts you should. It’s wise to make contributions at a young age so that the investment has time to grow. Only borrow from these accounts in an emergency. You will have to pay interest on the amount you borrow, which won’t be tax deductable.
Take advantage of all the benefits your employer provides. Companies often offer tuition assistance, mass transit allowance, and other tax-free perks to employees. If you aren’t sure, ask your HR department.
Many companies pay disability insurance premiums using tax-free money. However, if you become disabled and need those funds, you will have to pay taxes on that money. If you pay your own premiums, you’ll avoid having to pay those taxes later during that time of need.
Taking Care of Your Family
First things first, if you earn less than $75,000 as a single person or $110,000 as joint filers, claim the child tax credit – $500 for every child in your care.
Find out if your employer has a dependent care plan. If you set money aside for this plan, you will reduce the child care credit you can claim on your tax return.
If a financial emergency arises and you decide to withdraw funds from a traditional IRA, you can withdraw money penalty-free (but not tax-free) before age 59-1/2. Acceptable situations include:
• Medical expenses that exceed 7-1/2 percent of income
• Health insurance premiums for the unemployed
• Higher education expenses
• $10,000 of first-time home-buying expenses
Investments and Home Ownership
As mentioned above, start each year by contributing to your IRA. The sooner you allocate that money the more time that money will have time to grow. Next, don’t shy away from home ownership. Real estate properties make excellent investments, since you can deduct mortgage interest and property taxes.
When it’s time to complete your tax returns, deduct personal bad debts, and ask your accountant about how to deduct short-term capital losses.
Last, you should focus on solid investments, not shady ones. You should always avoid tax evasion schemes such as revocable foreign trusts and secret offshore bank accounts.
Read More About Divorces Finances in the California Divorce Guide