Tax Breaks for the Newly Divorced
The coming month can be difficult on many fronts, and for couples going through divorce, tax season can be particularly difficult – both emotionally and financially. However, it takes careful planning to avoid costly mistakes when it comes to taxes. Here are a few areas to remember:
Medical Expenses: If you continue to pay a child’s medical bills after a divorce, you can include those costs in your medical-expense deductions even if you don’t have custody of your child.
Asset Transfers: When property is shifted from one spouse to through a divorce, the property’s tax basis shifts as well. For example, if you get property from your ex-spouse in the divorce and later sell it, you will pay capital gains tax on all the appreciation before and after the transfer.
Home Sale: If you and your ex-spouse decide to sell your home as part of your divorce, the timing of the sale based on years of residency, can have tax consequences. The law allows you to avoid tax on the first $250,000.00 of gains on the sale of your home if you’ve owned and lived there two out of the last five years. If you sell after a divorce and have met this ownership/residency criteria, you and your ex-spouse can each exclude up to $250,000.00 of gain on your individual returns.
IRA Contribution: Typically, a taxpayer must have earned income from a job to qualify to contribute to an IRA. But there is an exception for some divorced people. Taxable alimony counts as compensation to make IRA contributions. If you’re at least 50 years old, you can contribute up to $6,500 to a traditional or Roth IRA or a combination of the two.