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Q: There's a lot going on in my life right now. Do I have to think about taxes, too? A: You don't have to, but if you don't, you'll almost certainly wish you did. Q: Where can tax matters help or hurt? A: The most common issues are filing status, exemptions, and built-in gain on assets that have gone up in value. Q: What are the tax issues for filing status? A: There are two central issues. First, how do you file in your last year together? Do you continue to file jointly? If one of you has a much higher income than the other, it may save thousands of dollars to postpone the divorce for a few months so you can file one more joint tax return. Do you file as married filing separately? This usually increases taxes, but might be necessary if you don't trust each other. Or does one (or even both) of you file as "head of household" (even if you are still legally married). This can give the spouse who files that way a tax advantage. To file as head of household while you are still married, you have to have lived separately for July through December, and supported a home and a child. (This is a bit of a simplification. You will want to check the exact tax rules before you actually file.) The second issue is how you file after the divorce. Unless you remarry, the choices are fewer: You can file either as single or as head of household. You would prefer to file as head of household, because the tax rate is always lower than the "single" rate. But you typically have to have custody of at least one child in order to qualify. Q: What are the tax issues for exemptions? A: In the matter of exemptions, the tax law grants unusual flexibility. In most cases, the parties can decide among themselves who claims the child as an exemption on the tax return -- regardless of which parent has custody. This is usually an invitation to the higher-income parent to negotiate to claim the child on his or her tax return. But not always. If a spouse's income is very high, that spouse loses the tax benefit of the exemption. So figuring out who should claim the tax exemptions is not always as straightforward as it seems. But there are typically hundreds of dollars of tax savings at stake. So it's worth figuring it out. Q: What are the tax issues for built-in gains? A: The situation of "built-in gains" arises whenever the parties own something that has gone up in value, whether it is stocks or investment real estate. To understand the issue, let's take an example: Suppose you own 200 shares of Coca-Cola stock. Suppose further that you bought 100 shares in 1980, for $20 a share. You bought the second block of 100 shares in 1998, for $80 a share. Suppose the shares today are worth $90 a share. Since the two lots of 100 shares each are both worth $9,000 ($90 a share * 100 shares), it seems it would not matter which lot you take. But it does matter! You definitely want to take the one for which you paid $80 a share. Why? Because when you sell that one, you pay tax on a gain of only $1,000 ($9000 minus $8,000). If you sell the other lot, you pay tax on a gain of $7,000 ($9,000 - $2,000). At a 20% tax rate, taking the "wrong" lot can cost you an extra $1,200 in taxes, plus any state taxes on the gains. Taking the correct lot -- even though they both have the same value -- can save you thousands of dollars in taxes when you sell. So you might be able to gain an advantage by careful planning of which specific investments you keep. You want to keep the investments for which more was paid. Q: Are there other tax matters to watch out for? A: Yes. A divorce can affect the child care credit, the earned income credit, the hope credit, and the lifetime learning credit, to name a few. Tax issues can have a significant affect what you do with your home or business. Taxes can determine how you handle your pension or IRA. A thorough investigation of all these can, again, save you thousands of dollars in taxes Q: Can Family Law Software help with this? A: Yes. the Family Law Software Financial Planner will walk you through all of these issues during the financial planning process. You will be able to see what breaks you qualify for, what breaks you can't qualify for, and what breaks you might qualify for with a little careful planning. With the Planner's calculations, you will be also able to see the impact in your case of each alternative. Is the tax saving hundreds of dollars, or thousands? That tells you how hard to fight for that particular point. | |||||||||||||||||||||||||
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