4 ways to lessen the tax sting of divorce — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
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4 ways to lessen the tax sting of divorce

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in Small Business Tax

If you’re in the process of divorcing, you have more on your mind than taxes. Still, if you make a few tax-smart moves before the decree is finalized, you can save big.

Here’s what we mean:

1. Figure out your return both ways. If your divorce decree is finalized before year-end, the IRS generally will treat you as being unmarried for the entire year. Usually, that’s a negative if one spouse earns substantially more income than the other. Conversely, joint filers may be hurt by the “marriage penalty” if both spouses’ incomes are relatively even.

2. Lock in alimony amounts. Payments that are designated as alimony in the divorce decree generally are deductible by the payor and taxable to the recipient. But child-support payments are nondeductible and tax-free, respectively. Keep that in mind as a bargaining chip during 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).

That may call for a transfer of ownership.

If any children are the primary beneficiaries, you’re considered to have retained ownership. Therefore, you can’t deduct the premium payments as alimony.

4. Salvage dependency exemptions.

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

If you’ve obtained a waiver, have your ex-spouse sign Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents).

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