They say the three hardest things for a person to go through is the passing of a loved one, losing a job and getting divorced. This blog will deal with the latter. Quite often - or maybe it is just quite often to those of us in the accounting profession - one hears jokes about the tax incentives behind marriage. And yes, like all good humor, there is some truth behind it.
Never - and this is because it’s rarely a joking matter - does one hear about the tax ramifications of a divorce, though. I do not want to be a downer (contrary to how other stereotypical jokes portray accountants), but wanted to spend a little time giving a few things to think about it if you or anyone you know find yourselves in this situation. Please keep in mind that everyone’s divorce situation is different and each one has different financial complications. What is good for one may not be good for someone else. As legal guidance is in your best interest, professional financial guidance is also in your best interest
SOCIAL SECURITY NUMBER
This is crucial even beyond your tax picture. When any life event leads to you changing your name, be sure to notify the Social Security Administration. If the name on your tax return doesn’t match the name that the SSA has for you, there could be problems processing your return.
HEALTH CARE CONSIDERATIONS
As most are already aware, the Affordable Care Act (Obamacare) requires people to have health insurance coverage or face tax penalties. Most people have taken care of this, but most people also don’t foresee situations where they will lose that coverage. This can happen during a divorce. That situation, though, qualifies as a life event that allows one to get coverage during a special enrollment period without waiting until the end of the year.
Apart from the potential losing of coverage, keeping your health insurer notified of name changes, life events, social security number changes, etc., is also something that should be done.
CHILD SUPPORT and ALIMONY
Child-support payments are not deductible and any child support received is not taxable. Alimony, however, works in the opposite manner. If you are paying alimony, that money can be deductible whether or not you itemize deductions. Not surprisingly then, alimony received is taxable.
IRA CONTRIBUTIONS
Here things start to get a little more complicated. If a divorce is completed by the end of a year, you will not be able to deduct contributions that you made to your former spouse’s traditional IRA. If you have your own, though, then you still may be able to deduct those contributions.
That final bit is not the only potential difficulty, though. I do not think this is the place to get too deep into too many of those issues, but just be aware they exist. As quick examples, any tax credits that were involved with a shared qualified health plan will have to be allocated between both you and your former spouse’s returns. And since alimony received is taxable, that might mean that the tax you paid during the year may no longer cover you obligations. If you are receiving alimony, you may be subject to estimated tax payments. Please feel free to call to discuss.
Overall, a divorce may result in the most complicated tax return you have ever submit. Yes, I know it is already a disconcerting, life-altering experience and no one wants to be reminded of it or continue to feel its ramifications. You also don’t want to ignore it, however, for if you do the effects will just linger longer. That means it is best to put someone on your side who knows how to handle these situations, makes sure they are correctly addressed, and can help you move beyond them.
As always, I am very happy to be your advocate who assist you in getting there.