Key Tax Tips on the Tax Effects of Divorce or Legal Separation
Although, income tax may be the last thing on one’s mind after a divorce or legal separation, however, these occurrences can have a significant tax impact on each party. Here are some tax tips to keep in mind if divorce or separation becomes inevitable:
1- Child Support. Child support is not taxable to the recipient spouse and not deductible to the paying spouse.
2- Alimony Paid. Alimony payments under a divorce or separate maintenance decree or written separation agreement may be tax deductible to the payor and taxable to the recipient, provided they qualify as alimony for tax purposes. Payments not subject to court decree or agreement do not qualify as alimony.
3- Alimony Received. If you get alimony from your spouse or former spouse, it is taxable in the year you receive it. Because alimony is not subject to income tax withholding, the recipient is advised to pay sufficient estimated taxes to avoid penalties and interest.
4- Spousal IRA. If you get a final court decree of divorce or separation before the end of your tax year, you can’t deduct contributions you made to your former spouse’s IRA.
5- Name Changes. If you change your name after your divorce or legal separation, notify the Social Security Administration by filing the Form SS-5, Application for a Social Security Card. Make sure your name on the tax return matches your social security card to prevent delay in processing your return.
Health Care Law Considerations
1- Special Marketplace Enrollment Period. If you lose your health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you may claim on your tax return. Losing coverage through a divorce is considered a qualifying life event and allows you to enroll in health insurance through the Marketplace during a Special Enrollment Period.
2- Changes in Circumstances. If you purchase health insurance coverage through the Health Insurance Marketplace you may get advance premium payments of the premium tax credit in 2015. Otherwise, you should report changes in circumstances to your Marketplace during the year. Changes to report include a change in marital status (marriage or divorce), a name change and a change in your family income or family size. By reporting changes, you will help make sure that you get the proper type and amount of financial assistance. This will also help you avoid getting excessive or too little credit in advance.
3- Shared Policy Allocation. If you get divorced or get legally separated during the tax year and are enrolled in the same qualified health insurance plan, you and your former spouse must allocate policy amounts on your separate tax returns to figure your proper premium tax credit and reconcile any advance payments made on your behalf. Publication 974, Premium Tax Credit, contains useful information about the Shared Policy Allocation.
Zaher Fallahi, Tax Attorney, CPA, is an IRS Tax Defense Attorney, and advises taxpayers including Americans Living Abroad and Non-Resident Aliens subject to the US tax law, in resolving their tax problems with their Offshore Voluntary Disclosure Program (OVDP), Report of Foreign Bank and Financial Accounts (FBAR), Foreign Account Tax Compliance Act (FATCA) and Foreign Trust. The firm handles Offer-In-Compromise and Non-Filed income tax returns. Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail [email protected]