6 divorce tax tips in the wake of the Brangelina split
Tuesday, September 20, 2016
If you follow celebrity news, you've already heard about the impending dissolution of the marriage of one of Hollywood's highest profile couples. Angelina Jolie is seeking a divorce from her husband of two years, Brad Pitt.
I'll leave it to the internet and tabloids, both print on television versions, to hash out the exact sordid "irreconcilable differences" Jolie cited in her Sept. 19 filing in Los Angeles Superior Court.
The couple, who share six children, was together for 12 years, but were officially married only two of those. Now their legal Mr. and Mrs. contract must be untangled, personally, professionally and tax-wise.
Well-populated celebrity Splitsville: Myriad celebrity break-ups mean I have blogged many times about the tax implications of divorce. Yes, I can be shameless about such things.
They include tax divorce advice after the splits of Rupert and Wendi Murdoch, Tiger Woods and Elin Nordegren, Jon and Kate Gosselin and Kim Kardashian's pre-Kanye West short-lived marriage to Kris Humphries.
Obviously, every marriage -- and divorce -- is intensely personal and unique.
But when it comes to taxes, there are some key areas that must be considered.
Here are six tax-related topics a splitting couple and their divorce and tax attorneys need to discuss, or depending on the circumstances, fight about:
- Child custody
This definitely is a tax concern that Jon and Kate and lots of Splitting parents must decide whether one parent will have primary custody or whether it will be shared relatively equally. That will affect which parent will get to claim the many child-related tax breaks.
- Alimony and child support
Alimony generally counts as taxable income to the person receiving it. It also can be deducted by the person paying it. Child support, however, is not taxable, either to the spouse receiving it or the children for whom it is supposed to be spent. And child support payments can't be deducted by the paying parent.
- Timing and its effect on filing status
The Internal Revenue Code deems you married or not based on your legal circumstances on the final day of the tax year. So a breakup that drags on could mean you'll end a year still married in the Internal Revenue Service's eyes even though you're trying to become single again. It might suit some couples to file separate 1040s as married filing separately. Or even thought things are rocky, a joint return could be better for both soon to be ex-spouses.
Again, look at your situation and talk with your professional advisers as to how your two filing options affect your income, exemptions, credits and deductions. And couples in community property states -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin -- take extra care.
- When to sell the house
A married couple gets to exclude up to $500,000 in home sale profit from taxable income. A single homeowner only gets half that tax-sheltered savings. So if there's a likelihood that neither spouse wants to keep the house long-term, look into selling it before the split or making compensatory arrangements for the spouse who'll keep it and get the smaller tax break when finally selling.
- All the assets and their tax costs Many divorces are nasty. Sometimes one partner, particularly the one who's been contemplating divorce longer, tries to hide income and assets before the process of breaking up begins. In these cases you -- more appropriately, your lawyer and forensic accountant -- might need to play detective and use tax returns to uncover hidden divorce assets.
Even when the property to be divided is clear, you need to carefully weigh the tax implications. Take, for example, a couple that has a tax-deferred retirement account and a regular investment account, both worth $100,000 each. Spouse A gets the retirement money; Spouse B keeps the regular account.
When A starts taking money from the retirement account, taxes will be due at ordinary tax rates on the earnings that have been accruing tax-deferred for years. B, however, will be able to pay generally lower long-term capital gains tax on that account's withdrawals. So pay close attention to assets' eventual tax costs when deciding who gets what.
- Don't forget state taxes
There are 50 states, plus the District of Columbia, and those jurisdictions will have final say over the end of a marriage. They also could have some tax matters that a divorcing couples needs to consider. Make sure your attorney is aware of your state's tax laws and how they could affect your divorce decisions.
I know taxes are even more fraught when they're tied to a divorce, but they need to be part of the discussions during the split so that both partners can go their own ways without also worrying about the IRS.
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