CARL WATTS & ASSOCIATES

August 31, 2015

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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Unlike weddings, there’s no divorce season, divorce or separation can, unfortunately, happen at any time of the year. We wholeheartedly wish you to never have to weather through such a disturbing experience, but if the “horse and carriage” need to brake apart, there are certain tax consequences that you should be aware of.

Apart from the most common changes that need to be reported, such as the name and/or address change, a divorce or separation may trigger other tax related effects that will most likely impact your next tax return.

If you change your mailing address, be sure to notify the IRS using Form 8822, Change of Address.

If you change your name, make sure you notify the Social Security Administration using Form SS-5, Application for a Social Security Card.

If you have been claiming a withholding exemption for your spouse, and you divorce or legally separate, you must give your employer a new Form W-4, Employee's Withholding Allowance Certificate, within 10 days after the divorce or separation showing the correct number of exemptions.

If you are divorced, you are jointly and individually responsible for any tax, interest, and penalties due on a joint return for a tax year ending before your divorce. This responsibility applies even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns.

In some cases, a spouse may be relieved of the tax, interest, and penalties on a joint return. You can ask for relief no matter how small the liability. There are three types of relief available:
  • Innocent spouse relief.
  • Separation of liability, which applies to joint filers who are divorced, widowed, legally separated, or who have not lived together for the 12 months ending on the date election of this relief is filed.
  • Equitable relief.

Married persons who live in community property states, but who did not file joint returns, may also qualify for relief from liability arising from community property law or for equitable relief.

Your filing status does not necessarily change from married filing jointly to single, you may be able to file as head of household if you meet all the following requirements.

  1. You are unmarried or “considered unmarried” on the last day of the year;
  2. You paid more than half the cost of keeping up a home for the year; and
  3. A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she does not have to live with you.

You are considered unmarried on the last day of the tax year if you meet all the following tests:

  • You file a separate return. A separate return includes a return claiming married filing separately, single, or head of household filing status.


  • You paid more than half the cost of keeping up your home for the tax year.
  • Your spouse did not live in your home during the last 6 months of the tax year. Your spouse is considered to live in your home even if he or she is temporarily absent due to special circumstances.
  • Your home was the main home of your child, stepchild, or foster child for more than half the year.
  • You must be able to claim an exemption for the child. However, you meet this test if you cannot claim the exemption only because the noncustodial parent can claim the child using the special rule for divorced or separated parents (or parents who live apart).

In most cases, because of the residency test, a child of divorced or separated parents is the qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if some special rule applies.

Divorce, Separation and
Tax Consequences
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If you obtained a final decree of divorce or separate maintenance during the year, you cannot take your former spouse's exemption. This rule applies even if you provided all of your former spouse's support.

Child Support.

If you pay child support, you cannot deduct it on your tax return. If you receive child support, the amount you receive is not taxable.


Alimony Paid. 

If you make payments under a divorce or separate maintenance decree or written separation agreement you may be able to deduct them as alimony. Paid alimony is deductible as an adjustment to income. This applies only if the payments qualify as alimony for federal tax purposes. If the decree or agreement does not require the payments, they do not qualify as alimony.


Alimony Received.

If you get alimony from your spouse or former spouse, it is taxable in the year you get it. 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 remarry, the support provided by your new spouse is treated as provided by you.


Spousal IRA. 

If you get a final decree of divorce or separate maintenance by the end of your tax year, you cannot deduct contributions you make to your former spouse's traditional IRA. You can deduct only contributions to your own traditional IRA.


The transfer of all or part of your interest in a traditional IRA to your spouse or former spouse, under a decree of divorce or separate maintenance or a written instrument incident to the decree, is not considered a taxable transfer. Starting from the date of the transfer, the traditional IRA interest transferred is treated as your spouse's or former spouse's traditional IRA.

All taxable alimony you receive under a decree of divorce or separate maintenance is treated as compensation for the contribution and deduction limits for traditional IRAs.


Health Care Law Considerations.

If you lose your health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. Losing coverage through a divorce is considered a qualifying life event that allows you to enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period.

If you purchase health insurance coverage through the Health Insurance Marketplace you may get advance payments of the premium tax credit in 2015. If you do, you should report changes in circumstances to your Marketplace throughout the year. Changes to report include a change in marital status, a name change and a change in your income or family size. By reporting changes, you 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.

If you are divorced or legally separated during the tax year and are enrolled in the same qualified health plan, 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.

You cannot deduct legal fees and court costs for getting a divorce. You may, thought, be able to deduct legal fees paid for tax advice in connection with a divorce and legal fees to get alimony. In addition, you may be able to deduct fees you pay to appraisers, actuaries, and accountants for services in determining your correct tax or in helping to get alimony. Fees you pay may include charges that are deductible and charges that are not deductible. You should request a breakdown showing the amount charged for each service performed. You can claim deductible fees only if you itemize deductions on Schedule A (Form 1040)as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit.

With all the expenses involved in a divorce or separation procedures, a little extra spent on tax and financial advice may prove quite worthy and actually save you money in the long run.