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Getting a divorce? 4 tax-smart moves to ease the pain

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in Small Business Tax

If you’re getting a divorce, there’s more on your mind than taxes. Still, if you make a few tax-smart moves before the decree is finalized, you can save big bucks down the road. Here are four tips:

1. Speed up or slow down. If you become legally divorced in 2011, you’re treated as being unmarried for the entire year for tax purposes. Therefore, you can’t use the tax rates available to joint filers. Usually, this is a negative if one spouse earns substantially more income than the other. Conversely, joint filers may be hurt by the “marriage penalty” if the incomes of both spouses are relatively even. Figure things out both ways.

2. Lock in alimony amounts. Generally, pay­ments that are designated as alimony in the ­divorce decree are deductible by the payer and taxable to the recipient. But child support payments are nondeductible and tax-free. Keep this rule in mind as a bargaining chip in the divorce proceedings.

3. Retain write-offs for life insurance. Be aware of a special rule for life insurance policies. If you continue to pay the premiums on an ex-spouse’s policy, you can deduct the cost only if your ex-spouse owns the policy and is the irrevocable beneficiary. (Children may be named as contingent beneficiaries.)

4. Salvage dependency exemptions. The general rule is that the parent with custody of children for most of the year is entitled to the dependency exemptions. Exception: If the custodial parent signs a formal waiver, the noncustodial parent may claim the exemptions.

Tip: If a waiver is being used, have your ex-spouse sign Form 8332, Release of Claim to Exemption by Custodial Parent.

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