How does divorce change your tax strategy?

Going through divorce is bad enough, the last thing you want to think about is your taxes. But after a divorce, you may be facing a very different tax situation, and it helps to determine your strategy well ahead of April 15.

How does divorce change your tax strategy?

Knowing the tax implications of child support and alimony, for example, will help you maximize your benefits. Alimony is considered taxable income, so you’ll want to watch that it doesn’t push you into a higher tax bracket. On the other hand, child support is not taxable income and should not be reported on your return.

It can help you plan tax optimization if you are able to cooperate with your ex: Strategies include transferring the tax exemption for your children to the noncustodial parent in exchange for increased support payments. Splitting child exemptions can be a fair way to handle this tax benefit post-divorce. Often it’s the parent with the higher adjusted gross income who will benefit; however, you can compare different scenarios to find the one that benefits you the most.

How children are claimed as exemptions on your tax return can have different consequences. For example, you can claim a child as an exemption if he or she is in your custody for at least six months out of the year and receives over half of his support from you. The noncustodial parent could claim this child as an exemption only when legally separated or living apart for more than six months.

Remember, you can still file a joint return, keeping marital tax benefits, while the divorce is pending — as long as you remain legally married as of December 31 of the tax year.

Blue Spark Capital Advisors

We're a fee-only Registered Investment Advisory and financial planning firm based in New York City and the Berkshires.

We specialize in working with women after divorce, death of a spouse, or other life transitions such as retirement or job change. We provide financial planning and investment management services.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.

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– Samuel Johnson (1709-1784)
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