The Tax Implications of Divorce and Separation by Joanie B. Stein, CPA
Posted on October 30, 2017
Among the many financial and emotional issues that couples will encounter on their road to a divorce are the implications that a final dissolution of marriage will have on their taxes. Following are some important tax-related issues for separated and divorcing couples to keep in mind.
Tax Filing Status
Legally separated and divorced couples have the option to file their individual tax returns as single taxpayers, or they may choose to file as heads of household when they have custody of minor children and are not married on the last day of the year. Couples whose divorces have not become finalized by the last day of the calendar year have the option to file a joint tax return as married filing jointly, or they may file two separate tax returns as a married couple, whichever will result in a lower tax burden. Often, this determination is best made under the guidance of an accountant, who can run the numbers for each filing status and determine which is more financially advantageous.
Estimated Tax Payments
Couples that make quarterly estimated tax payments during their marriage must determine which spouse will receive credit for those payments and any overpayments made in the year prior to a legal separation or divorce. While the credit will typically apply to the former spouse whose social security number is listed first on a prior year’s tax return, the IRS allows divorcing couples to come to an agreement to allocate estimated tax payments in any manner they choose. For example, a couple may agree to divide the payments equally, or they may choose to allow one individual to claim all of the payments, leaving the other individual with none. When agreement cannot be made, the IRS will typically divide the credit for prior year estimated tax payments proportion to each party’s separate tax liability. On a related note, taxpayers should remember that a divorce will ultimately change the amount of estimated taxes they will be required to pay each quarter.
Alimony and Child Support
The alimony an individual pays to a former spouse is tax deductible to the individual making the payments, as long as those payments are a requirement contained in a divorce decree or separation agreement. Any money given voluntary to a former spouse, outside of the final dissolution of marriage, is not deductible.
Alimony recipients must include those payments as a part of their taxable income on their annual tax returns. Under certain circumstances, it may be advantageous for recipients of spousal support to make estimated tax payments throughout the year or increase the amount of taxes withheld from their wages in order to avoid the possibility of a significant tax bill that alimony payments will create.
Individuals who change their names after a divorce must notify the Social Security Administration (SSA) to ensure that the name on file with the SSA matches the name on their tax return. This can be accomplished by completing Form SS-5, Application for a Social Security Card, which can be found online at www.SSA.gov or by calling (800) 772-1213.
In addition, individuals who purchase health insurance through an Affordable Health Care Marketplace must report to the Marketplace any changes to their names or addresses. Should an individual lose health insurance due to a divorce, he or she must enroll in new coverage during the Special Enrollment Period. Obamacare requires all individuals to have coverage for every month of the year or risk exposure to an individual shared responsibility payment.
Investments and Financial Accounts
To ensure that one spouse does not remain responsible for the liabilities of the other spouse, it is recommended that divorcing couples close joint credit card and bank accounts. One a couple settles all of their marital debts, each spouse should then open new accounts in their own names. It is equally important that individuals update the named beneficiaries on all of their financial accounts, including retirement plans and insurance policies, to ensure that their assets will not be passed to an ex-spouse upon their death. Any contributions an individual makes to his or her Individual Retirement Account (IRA) before the issuance of a final divorce decree is tax deductible only to that individual; Contributions made to a former spouse’s IRA are not deductible.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at firstname.lastname@example.org.