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How divorce affects your taxes: Part One

While the rules for divorced taxpayers have not changed in the past few decades, divorce itself has. Joint custody and other changes in the way couples divide property have made it more challenging to determine who owes what to the government at tax time. To help you gain a better understanding of how your divorce will impact your taxes, we have provided some tips regarding commonly-encountered issues.

Many people are confused about whether or not they can file as married when they are recently divorced or currently going through a divorce. Even if your divorce was finalized Jan. 1 of this year, you should consider yourself married when it comes to filing your 2010 taxes. However, if your divorce was finalized in December of last year, you are not able to file as married, even though you were married for a majority of the year.

There is also a third option. Some people in the midst of a divorce may qualify for "head of household" status, which could save money. To be eligible, you must have lived separate from your spouse for the last six months of the year, paid more than half the expense of maintaining your residence and be able to claim your child as a dependant. If you choose this option, you will need to file a separate tax return from your ex-spouse.

Another issue that people are often curious about is taxes on assets divided in a divorce. It may help to know that couples do not have to pay income taxes on assets that are transferred in a divorce proceeding. However, if you end up with the house, you may owe capital gains taxes, which generally become an issue if you choose to sell the house after the divorce. A married couple does not have to pay taxes on a gain of up to $500,000. But, a single person can only exempt half that amount. Therefore, if the house sells for more than $250,000 above what you and your ex-spouse paid for it, you will need to pay taxes.

Divorce can undoubtedly impact your tax situation. Therefore, it is important that you understand the rules as they apply to your circumstances. With proper planning and execution, you can significantly help yourself.

Source: Time, "Divorce and Taxes: Five Things You Need to Know," Kelly Phillips Erb, 6 April 2011

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William C. Gentry, Attorney at Law

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William C. Gentry, Attorney at Law
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Marietta, GA 30060

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