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Tax planning for suddenly singles

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," Lewis explains.

Paperwork mania

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 the IRS."

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 kind.

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"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 less.

-- Posted: April 13, 2000


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