#MIDDLEBURY
by Mark A. Burns
Whether we like it or not, a high portion of marriages end in divorce or separation. This month’s column discusses some of the tax implications you should be aware of if you are in this situation.
Alimony is taxable income for the recipient and tax deductible for the person paying it. The recipient may be required to make quarterly estimated tax payments related to the alimony income, and it is important to be aware that alimony is considered “earned income” for purposes of establishing if the recipient is permitted to make a contribution to their IRA account.
The person paying the alimony gets a tax deduction on the front of their tax return whether they itemize their deductions on Schedule A or not. So this means the deduction also flows through to the Connecticut income tax return. It should be emphasized that the IRS considers payments to be alimony only if they are required based on a legal divorce or separation decree. Voluntary payments cannot be considered alimony.
Child support payments have no tax implications; they are neither taxable income for the recipient nor tax deductible for the payer.
Retirement Plan – If you receive a portion of your spouse’s retirement plan account in a divorce (e.g., 401k, IRA, etc.) and want to avoid paying taxes on the receipt of those funds, then you are allowed to roll those funds (on a tax-free basis) over to your own IRA. However, it is important to do this the proper way using a Qualified Domestic Relations Order.
Health Insurance – If you are covered by your spouse’s health insurance, then generally you will be allowed to continue that coverage under the COBRA provisions. But if you have to pay the full amount of those premiums, you may be able to find more cost-effective coverage on your own, so it is important to get competitive quotes.
It also is important to emphasize that a divorce situation does not relieve you of the responsibility to have health insurance under the Affordable Care Act. In addition, if your health insurance is through the marketplace, you need to advise them of your “change in circumstances” to avoid possible unfavorable surprises on your tax return.
Change of Name – If your name legally changes as a result of divorce, it is important to notify the Social Security Administration of that change since your name on your tax return must match what the SSA is showing or there could be delays in processing your tax return.
The above is a very general overview of what can be a very complicated subject. Each person’s particular situation can be unique. Always consult a tax professional if you are uncertain about how tax matters might affect you.
Mark A. Burns, M.B.A., is a C.P.A. with Diversified Financial Solutions PC in Southbury. He can be reached at 203-264-3131 or Mark@DFSPC.biz.
