After the whirlwind of a divorce the the last thing on your mind is, “How do I file my taxes?” Is the first time in a long time since you filed married, joint? Let’s discuss some of the top things to consider so you can potentially maximize your return.
1-Can you file as Head of Household?
Head of Household is a better tax deduction as opposed to filing Single. This year the deduction for HOH is $20,800, whereas Single is $13,850. Here’s how you can tell if you can file as HOH:
1-Must be unmarried on the last day of the year
2-You paid more than 50% of the cost of maintaining your home for the year
3-You have a qualifying person living with you for more than half the year
A qualifying person can be a child, who can have temporary absences such as school, but did you know that a qualifying person can also be a dependent parent who doesn’t live with you. (Nice to have some help for the Sandwich Generation!) If you are paying for more than half of the expenses to maintain their home for the entire year (or assisted living facility) you can claim HOH status.
2-What does your Separation Agreement say about the Child Tax Credit?
Good agreements include who gets to take the Child Tax Credit each year. But beware, there are some guidelines to keep in mind:
1-Child must be under 18 on the last day of the tax year
2-Child must have lived with your for more than half the tax year.
3-The CTC starts to phase out for families with income about $200,000 (single filers) or $400,000 (joint filers)
4-You can assign the right to the CTC to the other parent using form 8332, if your agreement allows for this.
Consider maxing out your retirement contribution!
If you are recently divorced, you may not be thinking about retirement contributions if your spouse has always been the one in charge of this. However, here are a few things to keep in mind now that you are on your own.
1-If you have an employer plan, make sure to check your monthly contributions and company match guidelines. An employer plan like a 401(k) or 403(b) allows for up to $22,500 (under age 50) and up to $30,000 (over 50). Consider contributing at least the amount it takes to receive the full company match.
2-In order to maximize your tax savings, you should consider contributing to your pre-tax accounts first, i.e. 401(k), 403(b), IRA, etc. Even if you contribute to an employer plan, you may still be eligible for a Traditional or ROTH IRA. A Traditional IRA will add to your tax savings as the contributions are tax deductible. A ROTH IRA, however, allows you to contribute to retirement without any tax on the growth but does not help lower your tax bill to Uncle Sam. Depending on your income, you may be able to contribute to your IRA, up to $6,500 in 2023 (for those under age 50) and up to $7,500 if you are over age 50.
3- If you are self-employed, you can probably contribute more to retirement than a Traditional or ROTH IRA using a SEP, SIMPLE, or Solo(k). Being self-employed allows you to be own your boss and have amazing flexibility, but no one is contributing to your retirement accounts except you! Make sure you learn how best to potentially maximize your retirement contributions depending on the structure of your business entity and how much you make. Maximizing your pre-tax retirement contributions can help minimize your payment to the IRS.
Consult your financial advisor to find out what makes the most sense for you. But just because you got divorced, don’t fall asleep at the wheel on saving for retirement. You are worth it!
Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
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The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor.
Next Chapter Wealth Strategies is not affiliated with or endorsed by the U.S. Government or any governmental agency.
The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. 1733795 – 04/23