7 Commonly Missed Tax Deductions Easy Tax Hacks for Last-Minute Filers

7 Commonly Missed Tax Deductions Easy Tax Hacks for Last-Minute Filers

It’s that time again! The tax filing deadline is fast approaching. Before you file, take a look at this list of some commonly lost and forgotten tax deductions to make sure you’re not paying more than your fair share to Uncle Sam.If you haven’t filed yet, it’s time to get serious about gathering up your documents to prepare your return or request an extension of time to file.

Dig through your documents from last year, and let’s see what we can find. If you have any of these, you might be able to use it for a tax deduction.

1. The Sales Agreement for Your New Car (or Boat or Airplane)

You are allowed to deduct either the amounts you paid for state and local income tax or state and local sales tax. While the deduction for sales tax usually makes sense primarily for those who live in states that do not impose an income tax, in some cases your sales tax deduction may be higher.

The IRS has an online calculator to help residents of states that impose a sales tax calculate how much you can deduct based on the sales tax rates in your area and your income level. However, if you made a large purchase, such as a vehicle, boat or airplane, you can add the sales tax paid for those items to the amount calculated by the IRS.

The same goes for purchases of home building materials, so if you constructed a home or performed a major remodel, dig out those receipts.

2. Receipts for Charitable Contributions

Are you generous? Don’t miss out on these tax deductions. You probably won’t forget about large charitable gifts you made during the year by check or payroll deduction, but there’s been a big increase in online giving in the past few years and many people forget to save online receipts for tax time. Before you file, search your email inbox for keywords such as “gift” or “donation.” Even small donations here and there can add up to big tax savings at year end.

You are also allowed a deduction for miles driven for charity. Whether you’re delivering meals or driving to drop off donations, keep track of the miles you drive for charity.

3. Child and Dependent Care Expenses

Parents are often eligible for a variety of tax deductions. If your child or dependent is under the age of 13 and you paid for daycare expenses while you worked, or actively looked for work, you may be able to claim a tax credit for those expenses. The amount of the credit is a percentage of the daycare expenses you paid. The percentage depends on your Adjusted Gross Income.

Even if your child is in school during the day and you’re not paying for full-time daycare, you may be paying for before or after-school care or day camps during the summer months. Those expenses are eligible as well.

If you don’t know how much you paid for daycare during 2016, before you start combing through bank statements, ask your daycare provider. They can often print out a summary of the expenses you paid during the year.

You’ll also need your daycare provider’s name, address, and Social Security or tax ID number to complete Form 2441 for the credit.

4. Closing Documents for Purchases or Refinancing Your Home Mortgage

Whether you bought a home or just refinanced your existing mortgage, you’ll want to take a look at the closing statement before you file your return to take advantage of these tax deductions.

When you buy a house, you can deduct the points paid to obtain the mortgage in the year of purchase. When you refinance, you can deduct the points over the life of the loan. For example, you can deduct 1/30th of the points each year for a 30-year mortgage. The points are often referred to on the closing statement as loan origination fees.

When you pay off the loan, whether you sell the property or refinance again, you can deduct the remainder of the points not yet deducted.

While you’re reviewing the closing statement, look for any real estate taxes paid out of closing funds. You may be able to add these to the deductible real estate taxes reported on the Form 1098 Mortgage Interest Statement by your mortgage lender.

5. Job-Related Costs

If you are looking for work in the same area of work that you had in the past, you can deduct job-hunting expenses as miscellaneous itemized deductions.

Eligible costs include cab fares or parking fees, employment agency fees, fees for printing resumes, and the cost of postage. You can also deduct any food, transportation, and lodging expenses if you have to go out of town for a job interview.

If you pay for work-related expenses that aren’t reimbursed by your employer, you can deduct those expenses as miscellaneous itemized deductions as well. Eligible expenses may include license fees, continuing education, union dues, or uniforms.

6. Health Insurance Premiums

If you pay for your own health insurance, you may be eligible for a tax break. Normally, medical expenses have to exceed 10% of your Adjusted Gross Income for you to receive a benefit as an itemized deduction. If you are self-employed, you can deduct 100% of your premiums as an “above the line” deduction, meaning you don’t have to itemize to receive a benefit.

Self-employed people can also take an above-the-line deduction for any Long Term Care Insurance premiums paid.

7. Investment Expenses

If you itemize, you may be able to deduct fees for financial planning, investment advice, subscriptions to investment publications, and other costs related to your investments. You’ll need to exceed a percentage of your Adjusted Gross Income to get a tax benefit from miscellaneous itemized deductions, but you can add investment expenses to other miscellaneous expenses such as job-related costs, safe deposit box rental fees, and tax preparation fees. The more you find, the more likely it will be that you’ll be able to get a benefit for the deduction.

Are You Missing Important Documents to Support Tax Deductions?

Missing documents are not uncommon. Fortunately, most tax-related documents are easily replaceable.

If you lost a W-2, 1099, or K-1, call the issuer and request a replacement. Most banks, investment brokers, and student loan servicers now have 1099s available to download online.

If you are concerned you’ve forgotten something, the IRS is able to provide transcripts for prior year returns, account transcripts showing estimated payments made on your account, and Wage & Income transcripts showing all of the income reported to your Social Security number. You can request these transcripts by calling the IRS, or sign Form 2848 authorizing your CPA or tax preparer to request that information on your behalf.

When You Need More Time

If all else fails, you can request a six-month extension of time to file a complete and accurate return. Remember that the extension is only an extension of time to file, not an extension to pay. If you anticipate owing money, you may want to work with your tax advisor to estimate the amount due and pay it with your extension to avoid interest and underpayment penalties.

If you do request an extension, do yourself a favor and try to gather the information to file soon. October will be here before you know it and you don’t want to be scrambling to gather your information all over again in a few months.

Are you able to itemize tax deductions this year? Tell us in the comments below.

 

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    You're running out of time to file! It happens. You waited and waited and now, you're in a panic. Before you freak out, take a breath and remember that you're not alone. Think it through, then read these tax tips for divorced filers. Tax Tips Start With Filing Status Before…
Helpful Tax Tips for Divorced Filers Expert Advice to Get You Ahead - Even If You're Running Late

Helpful Tax Tips for Divorced Filers Expert Advice to Get You Ahead - Even If You're Running Late

You’re running out of time to file! It happens. You waited and waited and now, you’re in a panic. Before you freak out, take a breath and remember that you’re not alone. Think it through, then read these tax tips for divorced filers.

Tax Tips Start With Filing Status

Before you check the box to file as Single, consider whether you can claim Head of Household as your filing status.

Head of Household is possibly the least-understood but most valuable option for filing status.

With it, you’ll get a lower tax rate and a higher standard deduction. To qualify as Head of Household, you must meet all of the following criteria:

  • Be unmarried or considered unmarried on the last day of the tax year
  • A qualifying person must have lived in your home for more than half the year. Your child is a qualifying person even if you can’t take the dependency exemption for that child.
  • You must have paid more than half the cost of keeping up your home for the year
  • You must be a U.S. Citizen or resident alien for the entire tax year

If your filing status isn’t clear cut, check out this interactive IRS tool to help you determine your filing status after a divorce.

If your divorce was not yet final as of December 31st, you may be better off filing jointly with your ex since choosing to file Married Filing Separately forfeits a number of deductions and tax credits.

If you do file jointly, be sure to review the tax return before you sign. The IRS will hold you liable for what is being reported, whether your spouse or a professional accountant prepared the return.

Child Support & Alimony Tax Tips

Child support payments are never deductible for the parent paying the support and not taxable income to the parent receiving the support.

Alimony is a taxable income to the spouse that receives it and a deduction for the one paying it. This difference in tax treatment often leads to the person making the payments wanting to classify them as alimony while the recipients want to call it child support.

This difference in tax treatment often leads to the person making the payments wanting to classify them as alimony while the recipients want to call it child support.

If your payments are allocated between alimony and child support, take a look at this article to help you decide which is which.

Dependency Exemption

As a general rule, the custodial parent (the one the child lives with most of the year) claims the child as a dependent on their tax return. The non-custodial parent can claim the child as a dependent if the other parent signs a waiver agreeing not to claim the same child on his or her return. Form 8332 must accompany the noncustodial parent’s return each year he or she claims the child as a dependent.

For 2016, each dependency exemption will reduce your taxable income by $4,050. You’ll also be eligible for other valuable tax breaks such as the Child and Dependent Care Credit, the Child Tax Credit, and other tax benefits for higher education

Deducting Medical Expenses

If you continue to pay your child’s medical expenses after the divorce,  our tax tips for you is that you can include those costs in your medical expense deduction, even if your ex-spouse claims the dependency exemption.

Medical expenses are deductible as itemized deductions on Schedule A, only to the extent that they exceed 10% of your Adjusted Gross Income.

Legal Fees and Taxes

Most legal fees associated with a divorce are considered non-deductible personal expenses, but here’s a special tax tip for you: To the extent your lawyer’s work focused on tax issues such as alimony, dependency exemptions, or the implications of asset transfers between spouses, that portion is deductible as a miscellaneous itemized deduction.

To take advantage of this deduction, have your attorney break out an itemize the tax-related advice portion of the bill from the personal part.

Miscellaneous itemized expenses (which also include tax preparation fees, safe deposit box fees, investment and job-related expenses) are only deductible when they exceed 2% of your Adjusted Gross Income.

Asset Transfers Can Be Tricky

When assets are transferred as part of a divorce settlement agreement, the recipient doesn’t have to pay taxes on the transfer.

Were assets awarded to you in the divorce? Good for you, but pay attention to these tax tips about assets. If you decide to sell that property later, you’ll have to pay capital gains tax on all of the appreciation before, as well as after, that transfer.

If the asset in question is your primary residence, you are in luck. The IRS allows a single taxpayer to exclude up to $250,000 in gains on a home that served as your primary residence for two out of the last five years.

Capital gains taxes complicate the division of assets during a divorce. It may seem equitable to allocate $500,000 in cash to one spouse and a property valued at $500,000 to the other spouse, but if the property generates capital gains when sold, the property will actually be worth less than the cash.

IRS Resources

Filing taxes after a divorce may be even more complicated than when you were filing together. Fortunately, the IRS has several resources online to help taxpayers navigate complex issues. Publication 504 is a general reference for divorce issues including alimony, filing status, retirement, property settlements, exemptions, and legal fees. Publication 503 discusses child and dependent care expenses.

When You Need More Time

The 2017 tax deadline for filing 2016 taxes is April 18th. You haven’t missed it yet, but if that’s not enough, you can file for a six-month extension.

Remember that the extension is an extension of time to file your return, not to pay your tax bill. If you owe money, you’ll need to pay with the extension to avoid late payment penalties and interest.

If you owe money but can’t afford to pay right now, file an extension anyway. The late filing penalty can be ten times more than the late payment penalty.

If you are due a refund, you won’t be penalized for filing late, but you won’t be able to get your refund until you file. If you are a few years behind, it might be a good idea to get your 2013 return filed right away. You have three years from the original filing deadline to file and still receive your refund. If your 2013 return has not been filed by April 18, 2017, your refund becomes the property of the U.S. Treasury.

Don’t Procrastinate

Tax season is generally not a favorite time of year for most people, but it can be a particularly rough time if you are newly divorced or separated. Still, ignoring income taxes won’t make them go away. If you owe money but don’t make some effort to file your returns and pay the tax due, the IRS has broad powers to collect, including filing liens, levying bank accounts, and even garnishing your wages. The IRS could even decide to launch a criminal investigation.

The IRS is generally willing to work with people who respond to notices and demonstrate they are making an effort to get compliant. If circumstances beyond your control, such as health problems or other financial difficulties, prevent you from paying the tax owed, the IRS may label your account ‘currently not collectible’ and delay collection actions until your financial situation improves. This won’t reduce your debt, but it will delay collection activity until you are able to work out a payment arrangement.


(c) Can Stock Photo / innovatedcaptures

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What Men Need to Know About Alimony and Taxes A Clear Explanation of How the IRS Defines These Payments

What Men Need to Know About Alimony and Taxes A Clear Explanation of How the IRS Defines These Payments

When it comes to alimony and taxes, the IRS shows no mercy.  You need to know what they are looking for to avoid costly mistakes with your annual filing.

A 2014 report from the Treasury Inspector General for Taxpayer Administration (TIGTA) identified a $2.3 billion gap between the amount of alimony deductions claimed by taxpayers on returns and the corresponding income reported.

The IRS has made closing the alimony tax gap a priority in recent years. Many taxpayers have been audited or have gone to court over alimony deductions that were disallowed by the IRS.

What Is (and Isn’t) Alimony

It sounds straightforward, doesn’t it? But much of the alimony tax gap is due to confusion over what exactly the IRS considers alimony.

Alimony payments are deductible by the payor and taxable income for the recipient, but the definition of alimony for federal tax purposes is governed by the Internal Revenue Code, not by divorce decrees or court orders.

In order to be considered alimony for federal tax purposes, there are several requirements that must be met:

  • You cannot file a joint return with your former spouse and cannot be members of the same household when you make the payment or payments
  • Payments must be in cash (including checks and money orders)
  • The payment is received by (or on behalf of) your spouse or former spouse
  • Your divorce decree or separate maintenance agreement does not say the payment is not alimony
  • You have no obligation to make payments (in cash or property) after the death of your former spouse
  • Your payment is not treated as child support or as a property settlement

Payments for child support, property settlements, payments of community property income, and voluntary payments that are not required by the divorce agreement are never considered alimony and not deductible.

There are a few areas pertaining to alimony and taxes where taxpayers tend to get tripped up.

Unallocated Alimony/Child Support Payments

In a 2015 Tax Court Case, a doctor lost his alimony deduction because the divorce agreement did not allocate the amount the doctor was required to pay to his ex-wife between child support and alimony.

The divorce agreement provided that Dr. Donald Girard would “continue to tender unallocated alimony/child support in the monthly sum of $5,232 for a continued eight-year period with the provision as long as the former Mrs. Girard should not remarry or cohabitate.” The agreement was silent as to whether the payments would continue if either party died before the eight years elapsed.

Dr. Girard deducted the payments on his own return, but his ex-wife did not report the payments as income. When the IRS sent her a notice of deficiency, she fought their assessment and the Tax Court found in her favor since the agreement did not allocate what portion of the payments went to child support and what went to alimony. And they did not specify that the payments would cease at death.

Property Transfer Ruling on Alimony and Taxes

In 2015, the Tax Court ruled on a case where one former spouse tried to pay alimony with real estate.

In 2010, Christina Mehriarty and Bradley Williams agreed to a divorce settlement that called for Mehriarty to pay alimony to Williams of $4,000 per month for 60 months. Nearly a year after their divorce was finalized, Mehriarty offered to sign a quitclaim deed to transfer a piece of property to Williams in lieu of the $80,000 left in alimony. Williams agreed.

Mehriarty tried to claim an investment loss of $80,000 on her 2011 income tax return. When that deduction was challenged by the IRS, Mehriarty attempted to argue that the property transfer was a deductible alimony payment.

One of the first requirements for alimony in the tax code is that payments be made in cash or a cash equivalent. The tax court ruled that the property transfer was not alimony.

Paying Less Than The Total Required

If your divorce agreement calls for both alimony and child support and you pay less than the total required, your payments will be applied first to child support.

Any remaining amount will be considered alimony.

Joseph Becker and his wife Jennifer divorced in 2011. Becker was ordered to pay temporary child support of $801 per month and temporary alimony of $815 per month for the 10 months prior to their divorce. He was also ordered to pay child support of $540 per month and alimony of $500 per month, along with paying for his children’s health insurance, after the divorce was granted.

In 2011, Becker owed $8,205 for alimony and $8,307 for child support, for a combined total of $16,612. That year, he made payments totaling $9,688.

When Becker filed his 2011 tax return, he claimed an alimony deduction of $12,036, which the IRS disallowed.

Although Becker tried to argue that he allocated his 2011 payments between child support and alimony, the Internal Revenue Code is clear.

When it comes to alimony and taxes, the IRS  rules that payments that total less than the amounts specified in the divorce instrument will be allocated first to child support. Amounts will only be allocated to alimony once child support has been paid in full.

Third Party Payments

There is some good news when it comes to your taxes and alimony.

Payments made to a third party on behalf of your ex for housing costs, medical expenses, taxes, tuition, etc. may qualify as alimony.

Whether housing costs can be considered alimony depends on the ownership of the home.

  • If the home is owned by your ex but you pay the mortgage, real estate taxes, insurance premiums and other costs, you can deduct the payments as alimony. Your ex-spouse will have to claim those amounts as income and will be entitled to a tax deduction for the mortgage interest and real estate taxes, even though you actually paid those expenses.
  • If you own the home and pay the mortgage, real estate taxes, and other expenses while your ex-spouse lives in the home, you cannot deduct the payments as alimony and your ex-spouse doesn’t have to report the payments as income, even if she lives there rent free.
  • If the home is owned jointly as tenants in common, you can deduct half of the mortgage payments, real estate taxes, and property insurance you pay as alimony and your ex-spouse must report that amount as income.

You and your former spouse can deduct half of the real estate taxes and mortgage interest paid as itemized deductions. However, if you own the home jointly as tenants by entirety or joint tenants, none of your payments for taxes or insurance are alimony. You can claim all of the real estate taxes as an itemized deduction.

Exes often get in trouble by verbally agreeing that one spouse will pay expenses on the other’s behalf in lieu of alimony payments. For instance, you might offer to pay a medical bill for your ex and reduce your alimony for the month by the same amount.

While this is legally acceptable, those payments are easily forgotten at year end.

If you want to make that type of arrangement, it’s a good idea to get the agreement in writing so both spouses agree to recognize the payment as alimony for tax purposes at year-end.

The Last Word

With all of the intricacies of alimony and federal tax laws, it’s a good idea to get your tax preparer to weigh in during divorce agreement negotiations.

Your attorney may not be familiar with the tax implications of the specific wording in the divorce agreement. Remember that the way alimony is treated for federal tax purposes is ruled by the Internal Revenue Code, not your divorce agreement.

Getting professional tax advice early will save time and money in the long run.

 

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How Divorce Affects Your Tax Filing Status Intro to Federal Tax Liability During and After Divorce

How Divorce Affects Your Tax Filing Status Intro to Federal Tax Liability During and After Divorce

Taxes may be the last thing on your mind when you are in the middle of a divorce, but if your divorce wasn’t finalized by year end, you’ll have to consider your tax filing status before filing your next income tax return.

Should you file jointly with your soon-to-be-ex-spouse? Can you file single or Head of Household? The answer is not always clear-cut but can have a significant impact on your tax liability.

Understanding Your Tax Filing Status Options

Generally, your tax filing status for federal income tax purposes depends on your marital status, which is determined by state law.

Filing as Single

If at the end of the year:

  1. A final divorce decree has been issued, or
  2. You are legally separated from your spouse under a final decree of separate maintenance:

You are no longer married for tax purposes and must file as Single or Head of Household (which will be discussed in more detail below).

Your marital status is determined as of the last day of the year. Even if you lived with your spouse and were married eleven out of twelve months, if you were divorced or legally separated on December 31st, you are considered single by the Internal Revenue Service (“IRS”).

Married Filing Jointly

If at the end of the year:

  1. You do not have a final decree of divorce, or
  2. Separate maintenance agreement:

You are still considered married even if you lived apart from your spouse all year. In that case, you must file either Married Filing Jointly or Married Filing Separately.

Married Filing Jointly often results in the lowest tax liability for a married couple.

Married Filing Separately

Choosing the tax filing status Married Filing Separately results in the loss of several tax credits and deductions including the Earned Income Tax Credit, Child and Dependent Care Credit, and student loan interest deduction, among others.

In some cases, spouses may pay less in taxes by filing separately. Since tax brackets and the standard deduction for Married Filing Separately are half of those for jointly filed returns, spouses with equal incomes will generally owe the same tax under either filing status. However, if one spouse has significantly higher income or deductions than the other, the couple may owe less tax if they choose to file separately.

If you made deductible alimony payments under a separate maintenance agreement, the deduction can’t be taken on a joint return. In this case, you must file Married Filing Separately to claim the deduction.

Even if you owe more tax, there may be good reasons to file separately. When a couple elects the Married Filing Jointly tax filing status, the tax law holds both of the spouses responsible for the entire tax liability. This is referred to as joint and several liability. If the IRS audits your return and assesses additional tax, interest, and penalties, you could be liable for the entire amount, even if the errors on the return are related to your ex-spouse.

Provisions in your divorce decree holding your former spouse responsible for the tax will not prevent the IRS from attempting to collect the tax from you under the joint and several liability principles if your tax filing status was Married Filing Jointly.

How you allocate income and expenses between spouses for a Married Filing Separately return depends on whether or not you reside in a community property state.  In community property states, community income and deductions are split 50/50 between the two spouses, unless the spouses lived apart all year.

In non-community property states, each spouse reports their own income and expenses. Expenses paid with joint funds are considered to be paid half by each spouse unless you can prove otherwise.

Another important difference to note is that when one Married Filing Separately spouse itemizes deductions, the other spouse must also itemize. Often, one spouse has large itemized deductions such as mortgage interest, real estate taxes, and charitable deductions but the other spouse would achieve the best outcome by claiming the standard deduction.

Head of Household

Under certain circumstances, even if your divorce was not final by year end, you may qualify to be considered unmarried and designate your tax filing status as Head of Household.

To qualify, you must:

  1. Be a U.S. citizen or resident during the entire year,
  2. File a separate return,
  3. Have paid more than half the cost of keeping up a home that your spouse did not live in during the last six months of the year, and
  4. Your home was the main home of your dependent child for more than half the year.

Choosing Head of Household as your tax filing status makes a lot of sense if you are separated or divorced and have a dependent child living at home. This filing status affords a lower tax rate and a higher standard deduction than a Single filer.

Innocent Spouse Relief

If you file a joint return that is later audited and additional tax, penalties and interest are assessed, you may be eligible for innocent spouse relief.

To qualify for innocent spouse relief, you must:

  1. File a joint return,
  2. Have an understated tax on the return due to erroneous information from your spouse,
  3. Be able to show that when you signed the return you did not know that the errors existed,
  4. Show that it would be unfair to hold you liable for the understated tax, and
  5. Make a timely election to qualify for the relief.

All five of the criteria must be satisfied to qualify under for innocent spouse relief.

Innocent spouse relief is not automatic. You’ll have to apply by filing IRS Form 8857. The form should be filed as soon as you become aware of the tax liability. The IRS will review and make a determination if you qualify for relief. Your former spouse will also be contacted by an IRS representative and asked if he or she would like to participate in the process.

Preparing Your Tax Return

Many family law attorneys recommend that their divorcing clients hire a single, neutral Certified Public Accountant (“CPA”) to help handle joint tax filings for a couple in the midst of a divorce. The CPA will gather documents, make inquiries of both spouses, determine income and expenses, and prepare tax returns based on the best tax strategies available under the circumstances.

Your CPA may ask both spouses to sign a Conflict of Interest Waiver. A conflict of interest occurs when tax advice benefits one spouse over the other. Avoiding conflicts when working with divorcing spouses is hard to avoid and for this reason, many CPAs decline to work with divorcing spouses. While others specialize in evaluating and advising on the tax and financial aspects of divorce.

Don’t expect that you’ll be able to keep secrets about your income, assets, and investments from your spouse if you are filing a joint return. It’s important for both spouses to recognize that any documentation provided, or discussions about the preparation of a joint tax return are available to both spouses, and joint returns must be signed (and therefore reviewed) by both spouses.

Take Advantage of Federal Tax Advice

Take the time to examine your personal situation and file under the applicable status that offers you the best tax advantage. Picking the right divorced filing status isn’t always easy, and you may find that you qualify for more than one filing status. To learn more, check out the IRS Publication 501that includes tax filing status information – or use the Interactive Tax Assistant on the IRS website to get answers to a broad variety of questions.

Don’t give in to the temptation to file jointly just because it’s available. Take the time to think through your choices to determine the best, divorced tax filing status for your situation. Otherwise, you could end up owing a lot more after an already taxing year.

How did you figure out your tax filing strategy during your divorce? Tell us in the comments below.

Need to know if you are in a community property state? Check out the Guyvorce State Divorce Laws Summaries for information on the divorce laws where you live.

 

Help the next guy.

Share this financial divorce advice for men on your social media.


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Will Gray Divorce Put Your Retirement In Jeopardy? What You Need To Know To Protect Your Financial Security

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Divorce is often a blow to a couple’s finances. Legal fees, splitting assets, alimony and child support payments wreak havoc on budgets and bank accounts, but younger divorcing couples have something that older divorcing couples don’t have: time.

Gray divorce is the term for the trend of Americans age 50 and older, and it’s happening much more frequently today than it has in previous decades. According to a study from Bowling Green State University, the divorce rate among couples age 50 or older doubled between 1990 and 2012. In 1990, fewer than one in ten people divorced over the age of 50, compared to more than one in four in 2012.

Why is gray divorce on the rise?

There are many reasons that couples divorce later in life. It may come as a surprise to some that infidelity is rarely cited as a factor in gray divorce.

Age

When couples are younger, a large age difference may not have been an issue, but as a couple gets older, age differences may become more pronounced. The younger spouse may find themselves with greater energy and health than an older spouse. Hormonal changes may result in incompatible sex drives.

Boredom

During a couple’s working years, they may not spend all that much time together. Working on careers, raising children, and pursuing hobbies occupied a lot of time. When a couple is no longer spending 40 hours a week working, they may suddenly find themselves spending a lot more time with a person they’ve grown apart from over the preceding decades.

Complacency

Couples who have been together for a long time sometimes stop trying. They are no longer attentive, don’t make an effort to look attractive to their spouse, and become complacent.

Societal changes

In decades prior, religious or social norms may have kept couples together despite their differences, but older couples today grew up in a time where divorce was much more prevalent. It’s hard to imagine anyone alive today who has not seen a friend or family member go through a divorce. The stigma is no longer an issue.

Life expectancy

Longer life expectancies may also play a role. When a person reaches normal retirement age, he or she may have twenty years or more of active living to do. That’s a long time to spend with someone you don’t really like anymore.

Changing gender roles

According to a 2004 study by AARP, divorce among couples age 50 and above are initiated by women 66% of the time. In the past, women may have spent their lives raising children and caring for the home. They were financially dependent on their husbands and divorce would have left them penniless. Today, women are more likely to have careers and retirement accounts of their own. That financial independence means they are less willing to remain in an unhappy relationship.

Higher expectations

In the past, many couples married for societal and family reasons. Today, many people have higher expectations for what constitutes a successful marriage. Marriages are no longer just legal and societal structures for creating families. Spouses expect to be best friends and have a marriage that is a source of happiness and fulfillment.

Why does gray divorce jeopardize retirement?

When a couple divorces during their working years, they still have some time to work hard and try to put away money to make up for the financial blow of the divorce. But in retirement years, divorcing couples often find their retirement assets cut in half, and they’re out of time to make up those lost assets.

Divorcing couples of all ages may see their standard of living decline substantially, as it is more expensive to maintain separate households. Also, retirement assets are often divided. Suddenly, what looked like plenty of money for a couple to live on in retirement doesn’t look like much when it’s cut in half. For many, the only option is to delay retirement or go back to work to regain financial footing or pay alimony.

On average, older divorcees have only 20% as much wealth as older married couples. On the other hand, the net wealth of those who’ve been widowed over the age of 50 is more than twice the wealth of gray divorcees.

What do divorcing couples need to know about retirement?

Retirement accounts

For most couples, retirement accounts and pension represent a significant chunk of their net worth. Retirement accounts, including 401(k) plans, 403(b) plans, IRAs, and pensions earned during the marriage are typically considered marital property and should be included in the division of assets. However, if a spouse enters the marriage with funds already in a retirement account, those funds are considered separate property.

There are special federal and state rules that apply to the division of most retirement accounts. In many cases, if the divorce agreement states that the retirement accounts are to be divided, the court will need to order a Qualified Domestic Relations Order (QDRO, pronounced quad-row). The QDRO allows the funds in a retirement plan to be separated and withdrawn without penalty and deposited in the non-employee spouse’s retirement account (usually an IRA).

Social Security

If you were married for ten years or longer and did not remarry, you may be able to receive Social Security benefits based on your ex-spouse’s record, even if he or she does remarry.

You are entitled to a benefit based on your own earnings history or based on your ex-spouse’s earnings history, whichever is greater. The benefits you receive have no effect on the amount of benefits your ex-spouse will receive.

Don’t automatically choose to keep the house

Often divorcing couples fight over keeping the house or give up retirement assets in exchange for the marital home, but this isn’t always the smartest move.

The future value of real estate is always questionable. If you find yourself unable to manage the house payments, property taxes, and upkeep on the home and need to sell when the housing market is down, you can find yourself with a lot less of a nest egg than you planned on.

Also, selling a home could come with unintended tax consequences. When a married couple sells their primary residence, they can exclude up to $500,000 in gain on the house as long as they lived there for two out of the last five years. When a single person sells their primary residence, that exclusion drops to $250,000. If your gain on the sale of the home exceeds $250,000, you will have to pay capital gains tax on the excess. So if the value of the home has gone up significantly since you purchased it, you may be better off selling the home while you still qualify for the $500,000 exclusion.

Consider health insurance

Healthcare is a significant expense in retirement, so divorcing couples need to consider how to pay health insurance costs after a split. Often, one spouse is covered by the other’s employer-sponsored plan, but will no longer be eligible after the divorce. Meanwhile, Medicare is not available until age 65.

The Affordable Care Act has made individual health insurance plans more accessible but not necessarily more affordable. Lower premiums usually come only with high deductibles, so planning and saving for those costs is crucial.

Gray Divorcees Are Happier

Despite the financial toll that divorce takes on couples at or near retirement age, the news isn’t all bad. The same AARP study noted that 70% of those who initiated a divorce were confident they’d done the right thing and 80% of all respondents reported either a somewhat or very positive outlook on their life at present. It may make more financial sense to stay married later in life, but many older divorcees recognize that some things are more valuable than money. After all, when you realize your time here is finite, why spend it in an unhappy relationship?

Has gray divorce affected your retirement plans? How are you adjusting to a changed financial future? Leave your comments and questions below!

For related information, see What Do Do When Your Spouse Dies Before Your Divorce Is Final and financial analyst Dan Burgess’ tips for Financially Preparing for Divorce.

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(c) Can Stock Photo / JackF

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