Divorce can be one of life's most stress-inducing events. Though it is a common occurrence in our society, affecting 40 percent of first marriages and 60 percent of second marriages, the legal and financial ramifications are often poorly understood.
Divorce and separation situations may be complex, but some of their tax implications don't have to be. The IRS offers some vital tips to help eliminate confusion and clear up some common misconceptions about deductions, healthcare and more.
What is taxable? What is deductible?
Money often changes hands even after the divorce is final. It helps to know what type of payments given and received are taxable and which are deductible.
- Child support payments are not deductible. For the party receiving the payments, the money is not considered taxable income.
- Alimony payments are deductible as long as they were part of the divorce decree. If you choose to pay more than the amount specified in the decree or agreement, the overage is not deductible. For the spouse receiving alimony, the money is taxable.
- If you change your name after divorce, make sure that the name on your tax forms matching the name on record with the Social Security Administration.
What about health insurance?
The health care law requires year-round coverage for everyone. Those without coverage, even for part of the year, will be penalized come tax time if they do not qualify for an exception.
- Normally, you must sign up for health care through the Health Insurance Marketplace during an open enrollment period, which runs for three months per year or through your own employer. However, if you have lost health insurance coverage due to divorce, you qualify for a special enrollment period, which allows you to obtain coverage at any time.
- If your existing healthcare coverage is through the Health Insurance Marketplace, be sure to notify them of all relevant changes occurring as a result of your divorce. This includes name change, address change, change in marital status and changes to your income and family size.
You can learn more about how divorce or separation will affect your tax filing status and other tax considerations by reading the IRS Publication 504.
Your lawyer can also help you understand the financial implications of your divorce and connect you with other financial professionals to understand which spouse qualifies for what exemptions, who gets to claim the kids and other important details.