Tuesday, June 28, 2011

Annulment in the offing? Here are you tax consequences


It is never too early to start planning for April 15, 2012. As we wind our way through 2011, we should be aware of the always-present income tax consequences affected by our actions on this journey.
Well, what happened to marital bliss? For whatever reason, you have decided to either annul the marriage, or legally separate or file for divorce. If not properly handled, taxes can become a terribly unanticipated problem.
First, we will explore annulment of the marriage. During this discussion we will only consider the legal and tax aspects of an annulment of a marriage.
A decree of annulment holds that no valid marriage ever existed. This results in the following:
You are considered an unmarried person for the whole year and your filing status has changed to Single, or if you meet certain requirements, Head of Household
You must file amended returns (Form 1040X, Amended U.S. Individual Income Tax Return) for all tax years affected by the annulment that are not closed by the statute of limitations.
On the amended return, you must change your filing status to Single, or if you meet certain requirements, Head of Household.
The statute of limitations generally does not end until 3 years after the due date of your original return.
An absolute decree of annulment ends the marital community in all community property states. Even though it holds that no valid marriage ever existed, the decree of annulment usually does not nullify community property rights arising during the “marriage.” You should check your state law for exceptions.
The general definition of community property is all property that has been acquired during the marriage, other than a gift or inheritance (commonly referred to as separate property).
Some basic housekeeping steps should also be acted upon as follows:
• Notify the Social Security Administration (SSA) of any name changes. This will update the records of the SSA to prevent problems when trying to claim Social Security benefits.
• Notify the IRS of any name change and/or change of address, if necessary.
• Review IRS Form W-4 and FTB Form DE-44, to adjust payroll tax withholding by your employer.
• Update all your financial accounts with name change and/or change of address where necessary. This is important because of the mailing of various tax information documents, particularly year end IRS Forms 1099, W-2’s, etc.
• Notify the Post Office of your change of address so you won’t miss getting your mail.
For more detailed information on this subject, refer to IRS Publication 504, Divorced or Separated Individuals and IRS Publication 555, Community Property, both of which can be found on www.IRS.gov.