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Tax Traps to Avoid During Divorce

  1. Not deducting professional fees for attorneys, accountants, financial counseling, etc. that are paid to receive alimony or retirement funds (if you qualify).
  2. Failing to take the alimony tax deduction (usually the husband).
  3. Filing your tax return as "married filing separate" (during separation) prior to consulting an accountant for their recommendation.
  4. Accepting the transfer or redemption of stocks/capital gains assets without considering the tax consequences.
  5. Allowing your ex-spouse to take the children as a tax deduction when they do not qualify as head of household and therefore can't take the deduction. The requirements include that the children must spend 51% of their time with the parent to qualify for the deduction.
  6. Failing to take the following tax deductions:
    • Education credit
    • Earned income credit
    • Child and dependent care credit
    • Child tax credit
    • Additional child tax credit
    • Dependent exemption (up to age 24)
    • Child care credit
    • Medical expenses (if self-employed you can deduct half of your health insurance premium or medical expenses in excess of 7.5% of your AGI)
    • Self-employment deduction (half of self employ tax which is 15.3% of your self employed income)
    • Self-employed business deductions
    • Moving expenses
    • Cost of house appraisal

  7. Under-withholding taxes from your pay check. After divorce the alimony recipient should consider quarterly tax payments.
  8. Not knowing that you can withdraw retirement fund money penalty-free if the transfer is done prior to the divorce being finalized. You will pay taxes on this money, but not the 10% penalty.
  9. Failing to have a direct rollover (institution to institution) of IRA/retirement funds and therefore receiving a 10% penalty and taxes owed on the division of retirement funds per the MDA.
  10. Failing to have HSA funds transferred institution to institution.
  11. Failing to have tax refunds/credits or capital gains losses carried forward as divisible assets and mentioned in the MDA.

It is recommended that you hire a CPA to complete your tax return the first year after your divorce. This will ensure that it is the return is done properly and you receive all deductions for which you qualify. Your divorce may finally be over, but the tax effects can continue for years.

Please consult your tax advisor concerning the information addressed above to ensure it applies to your unique situation. Take the time to understand the numbers before you sign your divorce settlement. Secure your future. Getting a financially smart divorce also includes properly wrapping up the loose ends (changing your will/beneficiaries, Health Care Power of Attorney etc.) once the divorce is over.

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