Tax Effects of Divorce | Be Aware of Them

8 Tax Effects of Divorce You Need to Consider

Anyone contemplating divorce has many issues to consider, the least of which is income tax. However, how your divorce is structured could have a serious impact on your income taxes. The two primary points that most couples are usually concerned with are alimony and a name change, but these are only two of many tax effects of divorce issues that must be considered.

The following are some important issues to consider in a divorce proceeding:

1. Child support payments. Any payments structured as child support are not deductible on your tax return for the payer and are not income for the one receiving the payments.
2. Alimony paid. Any payments that are made under the decree of a divorce or separate maintenance, or a written separation agreement, are deductible alimony payments. However, these payments must qualify as alimony for federal tax purposes. If the decrees or agreements do not require these payments, then the payments are not deductible as alimony.
3. Alimony received. [bctt tweet=”Any funds received from a spouse or a former spouse as alimony, is taxable income in the year that you receive it.” username=”HBSMoneyTips”] Furthermore, tax withholding is not required for alimony payments, so the recipient may have to either make estimated tax payments or increase tax withholding from other sources, such as wages.
4. Spousal IRA. If the final divorce decree or separate maintenance is received by the end of your tax year, then you are not permitted to deduct any contributions that you may make to your former spouse’s traditional IRA. You would still be eligible to deduct any contributions that you make to your own traditional IRA.
5. Name changes. If you want to change your name after the divorce is final, you need to contact the Social Security Administration and complete Form SS-5, an Application for a Social Security Card. These forms are available on the SSA.gov website or you can also call them at 1-800-772-1213 to request the form by mail. The names on the tax returns being e-filed must agree with Social Security records, otherwise the return is rejected and any refund may be delayed.
6. Health Care Law. There are times, because of a divorce, where you may lose your health insurance coverage. However, you are required by law to have coverage for every month of the year for yourself and any dependents that you can claim on your tax return. When you lose health care coverage because of a divorce, this is considered to be a qualifying life event. You then are permitted to enroll for coverage through the Health Insurance Marketplace when a Special Enrollment Period is in effect.
7. Changes in circumstances. Should you purchase health insurance coverage through the Health Insurance Marketplace, it is possible to receive payments in advance for the premium tax credit in 2015. If this is applicable to you, you need to report these changes in circumstances to your Marketplace during the year.

Some of the changes in circumstances that you need to report are a name change, a change in marital status, change in income and/or family size. When you report these changes, you will help to determine that you receive the correct type and amount of financial assistance. It also makes sure that your advance payments are correct too. Don’t take the tax effects of divorce lightly.

8. Shared policy allocation. Should you become divorced or legally separated during the year, and you and your spouse are enrolled in the same health plan, you both need to allocate the policy amounts on your individual tax returns, This is done to calculate each premium tax credit and then to reconcile with any advance payments that were made.

If you require further information concerning the Shared Policy Allocation, there is Publication 974-Premium Tax Credit available to you. These tax effects of divorce are very important and you may require qualified assistance to protect your rights.

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Gust Lenglet

Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland.  He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a large multi-state law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.

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