Tax planning for suddenly
Has your marriage taken a dramatic turn ? If you're
suddenly single, then it's time for some serious tax planning. Financial
planning decisions must be made in 2000 for 2001, to assure that
you get all the deductions and credits that you are due.
"One of the first things I would advise a single person,
especially a divorced person, is to make sure they have a copy of
this prior year's return," says Elliott Lewis, a certified public
accountant with Felesina & Associates in Reno, Nev.
Why? Because any time there is a status change --
divorce, separation or other unforeseen circumstances that lead
to single-hood -- one party often finds it extremely difficult to
get information from the other party.
"If there is a property division taking place or a
holding period on an investment made jointly, these matters will
become vitally important when trying to file next year's return,"
Record-keeping is one of the most important steps
in tax planning for anyone, but it is vital to someone whose records
suddenly have been split in two, adds Bart Fooden, CPA and partner
with Bard & Glassman in New York City.
"The general rule is that you keep your records for
three years after you file your tax returns, but this is very important
to remember if you are separating or divorcing," Fooden says. "The
former partner needs to have copies of all records, or errors will
occur in filing [next year's] taxes that will raise red flags with
Tax professionals recommend that single people (and
everyone else, for that matter) keep accurate records of all W-2s,
1099s, mutual fund statements, brokerage fund statements and other
investment information in an organizer or document sheath of some
"One of the most frequent problems with the IRS on
any kind of return is forgotten information, and in a divorce or
other single situation, record-keeping is essential," Fooden says.
Certain records should be retained for a longer period
than other documents, including any receipts and records that have
to do with buying a house or making improvements to property. Purchases
or reinvestments of mutual funds or stock trades all require the
original purchase records for tax purposes.
"Anything you pay cash for has to have accurate receipts,
too," Fooden says. Problems often arise when suddenly single people
realize the other party has the paperwork and it's time to file
taxes. Requiring copies of all receipts and records would be a good
thing to iron out during the divorce negotiations.
The kids are all right
When filing separately for the first time, other issues
arise. Joint custody of children in separation and divorce will
call for a decision on who claims whom in terms of dependents. Many
parents split dependents. Make sure you know who is claiming which
child, or another red flag could go up at the IRS.
"One thing you have to know as a suddenly single person
is what the other party is doing," Lewis adds. "If your former spouse
is not paying the bills, bankruptcy could be forced upon you by
the creditors and you would be stuck with the bill ... simply because
you were married at the time the debt was incurred."
So even though you're alone, on your own and perhaps
happy by choice, it pays to keep up with the ex-spouse's financial
comings and goings. It seems unfair on the surface, but their actions
can and will affect your return, Lewis says.
"Each spouse is liable for the entire tax incurred
when married, unless you can prove you're an innocent spouse," he
added. It would be easier to try to keep track of expenses by both
parties to eliminate any tax-time surprises.
Check that W-4
Every year, you should review the amount of tax withheld
from your paycheck. A change in marital status or change in numbers
of dependents may require income adjustment. Many accountants, including
Fooden and Elliott, recommend annual examination of withholding.
Education credits and the $500 child tax credit could lessen your
tax liability, so withholding amounts actually could be considerably
-- Posted: April 13, 2000