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Home | Divorce and Taxes – What You Need to Know to Avoid Getting Burned by Uncle Sam

Going through a divorce can be one of the most emotionally and even physically draining events in life.  The process of sorting out child custody issues, dividing assets, and deciding how much child support and alimony are to be paid can take months in the courts, cost tens of thousands in legal fees and costs, put tremendous strain on all kinds of relationships, and cause enough stress to shave years off your lifespan.
While all of this is certainly hard enough, you may not be aware that a divorce also fundamentally changes your relationship with everyone’s favorite government agency – the Internal Revenue Service.  If you have recently divorced, are going through the process of divorcing right now, or are feverishly taking notes on your spouse’s many atrocities for use in your impending divorce petition, then here are the “Magnificent Seven” tax issues related to divorce you will be glad you know:

  1. Child Support. If you are on the receiving end of child support payments, the money you receive is not taxable income.  On the flipside, if you are making child support payments, the amount you pay is not tax deductible.
  2. Alimony. Unlike with child support, if you get alimony from your former spouse, that money is taxable in the year you receive it. However, keep in mind that alimony is not subject to tax withholding, so you may need to increase the tax you pay during the year to avoid a penalty.  To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages.  If you are paying alimony to a former spouse, you can deduct the amount you pay, as long as it is paid pursuant to a valid divorce or separation decree.  Alimony payments are above the line deductions, which means you get to take them before you get to your adjusted gross income and they reduce your taxable income whether you itemize or not. Any voluntary payments you make outside a divorce or separation decree (because, yeah, that definitely happens a lot) are not deductible.  To get the deduction, you must enter your spouse’s Social Security Number or Individual Taxpayer Identification Number on your Form 1040 when you file.
  3. Spousal IRA.  If you get a final decree of divorce or separate maintenance by the end of your tax year, you won’t be able to deduct contributions you make to your former spouse’s traditional IRA. However, you may be able to deduct contributions you make to your own traditional IRA.
  4. Changing Your Name. If you change your name after your divorce, it is critical that you notify the Social Security Administration (“SSA”) as soon as possible.  You will need to file Form SS-5, Application for a Social Security Card.  You can get that form online at ssa.gov.  The name on your tax return must match SSA records.  A name mismatch can cause problems in the processing of your return and will very likely delay any refund you may have coming your way.
  5. Special Marketplace Enrollment Period.  The last three of the “Magnificent Seven” are brought to you courtesy of the Affordable Care Act (the “ACA”) – you may know it as ObamaCare. If you lose health insurance coverage due to a divorce, the ACA still requires you to have coverage for every month of the year for yourself and the dependents you can claim on your tax return.  However, you don’t have to wait for the next Open Enrollment Period to obtain coverage. Your divorce will afford you a “Special Enrollment Period” during which you may enroll in health coverage through the Health Insurance Marketplace at healthcare.gov or your state-specific website.
  6. Changes in Circumstances. If you have purchased health insurance coverage through the Health Insurance Marketplace, you may get advance payments of the premium tax credit. If you do, you should report changes in circumstances to your Marketplace throughout the year.  These changes include a change in marital status (i.e. a divorce), a name change, a change of address, and a change in your income or family size.  Reporting these changes will help make sure that you get the proper type and amount of financial assistance.  This will also help you avoid getting too much or too little credit in advance.
  7. Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan as your former spouse, then you and your former spouse must allocate policy amounts on your separate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. IRS Publication 974, Premium Tax Credit, has more information about the Shared Policy Allocation.

Contrary to popular belief, the IRS isn’t out to get you – well, unless you’re a conservative group seeking non-profit status.  The IRS website (irs.gov) really does have a lot of helpful information on many topics, including this one.  For more information on how divorce may affect your taxes, take a look at IRS Publication 504, Divorced or Separated Individuals, and for information tailored to your specific situation, please speak with a qualified accountant or tax attorney.

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