Divorce is an emotional event. In the midst of a difficult life change, some couples miss important matters of the estate, such as determining how to handle the filing of an income tax return. Here are three significant steps to help plan accordingly and avoid penalties.
Consult A Professional
Consult with your attorney and/or tax advisor to understand potential tax implications and tax savings specific to your situation. Get an estimate of federal and state taxes that would be due for a separate filing and for a joint filing status. Try to have an agreed arrangement between you and your estranged spouse written out at the time of the finalization of the divorce. If this isn't possible, you will need to file your tax return separately.
The Name Change Game
It's quite common to take the last name of your spouse or hyphenate the name with your last name; but, if your plan is to go back to your name prior to the marriage, make sure the name on your tax return matches what's registered with the Social Security Administration (SSA). The SSA will provide Form SS-5 (the "Application for a Social Security Card") at local offices, or you can access the application on the SSA website.
It will generally take two weeks to have the name change verified.
Determine Your Filing Status
This is very significant. As the Internal Revenue Service explains, this status determines standard deductions, whether you can claim certain deductions and credits, the correct tax and whether you even need to file a return at all. It's contingent on your martial circumstances at the last day of the tax year, December 31st.
For instance, if you and your spouse decided to live physically apart during the middle of the year, you'll likely file married but filing separately. If you are divorced under a final decree by the last day of the tax year, you are considered unmarried for the whole year. Your filing status is single and you won't be able to file a joint return. (Just because you are in love doesn't mean that a joint return is best for both of you. Check out Happily Married? File Separately!)
You may be divorced, but that doesn't mean you aren't responsible for previous joint returns. Most tax, interest and penalties will still be due.
What To Watch For
Divorce is often a complex transaction. Each couples' circumstance may vary, but here are six common issues that the Internal Revenue Service addresses:
- Child support is not taxable to the recipient or deductible for the payee
Alimony is taxable to the recipient in the year it was received
Dividing pension can be aided with a qualified domestic relations order, or QDRO. This is a court ruling that takes some of a spouse's pension and awards it to the other spouse in order make the distribution equitable
Typically, no gain or loss is recognized when property is transferred
If you adopted your former spouse's child, a Social Security Number or an Adoption Taxpayer Identification Number will be needed
- Legal fees and court costs can't be deducted; but, the cost for tax advice related the divorce can be
The Bottom Line
A divorce can be an unsettling experience. By educating yourself on the tax repercussions of your newly single status, you can avoid any unpleasant surprises from the IRS. (You may be losing certain tax benefits now that you are single. Read The Tax Benefits Of Having A Spouse to learn more.)