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13 April 2014

How to ‘consciously uncouple’ your taxes

Paltrow poses as she arrives for the world premiere of the video "My Valentine" directed by Paul McCartney in West HollywoodIn fact, filing taxes after you divorce, or even separate, may be trickier than when you were together. And, as if to add insult to the emotional injury of ending a marriage, your first “uncoupled” tax bill might deliver a major financial blow.

That’s because receiving alimony, dividing up property and other assets “can become complicated very quickly,” says Michelle Crosby, co-founder and chief executive officer of Wevorce, an online, fee-based service to help couples divorce amicably.

“The biggest taxable events are not necessarily part of the divorce process, but play out afterward,” adds Roy Nelson, who holds the lofty title of fiscal architect in addition to certified public accountant at Wevorce.

I got divorced last year after 10 years of marriage. My ex- and I always did our taxes together. As a new member of the First Wives Club, I treated this year’s tax return as my own personal finance experiment using software from TurboTax, which is a unit of Intuit.

Here is what I learned:

WHO CLAIMS THE KIDS?

Be careful about who claims the children as dependents to get a valuable tax deduction. Prior to 2009, you could specify in a divorce decree which parent could claim the dependency exemption.

But you can no longer use a divorce settlement agreement to back up your claim of dependency. Instead, you have to use IRS Form 8332, eloquently titled “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent,” and it must be signed by the custodial parent for use by the non-custodial parent.

The tax implications are significant: for each dependent, you can deduct $3,900 from your federal taxable income, which is likely to reduce your taxes. (As a reminder, a tax deduction is something that reduces the taxable income you claim on your return. A tax credit directly cuts how much tax you owe.)

Each qualifying child must live with you more than half of the year and be under the age of 19 at year-end. This exemption also applies if your child is under 24 and a full-time student for the year – defined as attending school for at least part of five calendar months during the year.

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