Divorce or Separation and the Tax Consequences

Thursday, September 03, 2015

Aside from alimony, child support, and a name change most people do not consider the tax consequences of getting a divorce or a separation from their spouse. Although, such a major life change can have a big impact on your tax situation. Here are a few things to be aware of:

  • Child support paymentsare neither deductible for the payee nor included in the income of the recipient.
  • Alimony payments are deductible from the payee’sgross income includable as incomeon the recipient’s tax return. In order to avoid owing additional taxes at year end, the recipients of alimony should either make estimated tax payments or have additional taxes withheld from their paycheck. There are two conditions that must be satisfied in order for the payments to be deductible/includable.
    • Payments must be made under a divorce decree or separation agreement.
    • Only the amount specified as alimony in the agreement or decree is deductible or includable. Wording in an agreement that states “$XX amount for alimony and child support will be paid monthly” will not be deductible. The amount stipulated as alimony must be easily identifiable. Spouses that include additional money with the alimony payment CANNOTbe deductible nor is the extra amount included as taxable income.
  • Contributions to a spouse’s traditional IRA are not deductible if a final decree or separation agreement is reached before year end. Contributions made to your own traditional IRA may be deductible.
  • Name Changes can confuse a computer and really foul up a return. If you change your name as part of your divorce or separation, notify the Social Security Administration using Form SS-5 which can be downloaded from SSA.gov or by calling 1-800-772-1213.
  • Health Care Law Considerations
    • Loss of health insurance because of a divorce or separation does not relieve you of the requirement to have health insurance. Certain qualifying life events (loss of healthcare coverage because of divorce or separation meets the test) allow you to enroll for coverage through the Health Insurance Marketplace during a special enrollment period.
    • If you are receiving advance payments of your health care premium tax credit for 2015 because you purchased your health insurance from the Marketplace, you should report your change of circumstances to the Marketplace. Changes to report include changes to your name, marital status, income or family size and reporting these changes can help you make sure you are getting the correct amount of premium tax credit.
    • If you and your former spouse share the same health care coverage plan purchased through the Marketplace and are divorced or separated (by legal agreement) you must allocate the policy amounts on your separate tax returns to correctly calculate your premium tax credit and advance premium payments made on your behalf.
For more information on this topic, download Publication 504 from www.irs.gov. As always, the best course of action is to consult a qualified tax professional.
For more info see our Tax Planning South Florida page