What are Qualified Retirement Plan Benefits?

In a divorce, it is common that one spouse’s qualified retirement plan benefits are often used to pay property settlements. Qualified plan benefits paid to a nonspousal alternate payee do not receive special tax treatment and are taxable to the employee-participant.

 

A “qualified domestic relation order” (QDRO)

A “qualified domestic relation order” (QDRO) is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements.

 

What is a “Qualified domestic relation order” (QDRO)?

The important difference is that amounts paid to a spouse or former spouse under a qualified domestic relations order (QDRO) receive special treatment. The former spouse treats the distribution the same as the employee-participant. Such payments are taxable to the spouse or former spouse, not to the employee-participant.

A distribution made to the plan participant’s spouse or former spouse can be partially or wholly rolled over tax free to the spouse’s eligible retirement plan if it is done within 60 days of receipt and:

  1. it is distributed to the recipient under a QDRO, and
  2.  it would have met the definition of an eligible rollover distribution if it had been made to the employee (see Key Issue 5F).

 

What Is a QDRO?

A qualified domestic relations order is a judgment, decree, or order that recognizes the rights of an individual other than the retirement plan participant (employee) to a portion of the benefits payable under the retirement plan. The QDRO establishes the ex-spouse’s legal right to receive a designated percentage of qualified plan account balance or benefit payments. The QDRO requirements must be carefully followed to ensure taxpayers of the intended results.  The QDRO arrangement permits the ex-spouse to withdraw his/her share and roll the money over into his or her own IRA to the extent current withdrawals are permitted by the terms of the qualified retirement plan.

 

Qualified domestic relations order

It is very important for a divorce lawyer to consider the effects of a qualified domestic relations order  and the potential tax consequences of such actions. To receive tax-free treatment, the divorce decree (or separation agreement) must specifically require the transfer and that the transfer be made directly to an IRA in the name of the spouse or former spouse.

 

What information must a domestic relations order contain to qualify as a QDRO under ERISA?

QDROs must contain the following information:

  • The name and last known mailing address of the participant and each alternate payee
  • The name of each plan to which the order applies
  • The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee
  • The number of payments or time period to which the order applies

 

Are there other requirements that a domestic relations order must meet to be a QDRO?

There are certain provisions that a QDRO must not contain:

  • The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan
  • The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value)
  • The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO
  • The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse

Tax Return Rejected For Child Care Expenses and Earned Income Credit EIC

Childcare Costs with Divorced Parents

Only the custodial parent gets to claim childcare costs. Like someone mentioned there’s only parent parent that claim the child since there’s an odd number of days so one of you have to decide who’s the custodial parent for that particular child.

 

Tax Return Rejected For Child Care Expenses and Earned Income Credit EIC

Whoever is the non-custodial parent should only be able to get the exemption and the child tax credit. All other tax benefits go towards the custodial parent. EIC and child dependent care credit go to the custodial parent.

The parent who the child was with longer in the year gets to claim the child for Child Care Credit and EITC. No one ever has a child half the year because there are 365 days in a year. You can either keep trying or find out exactly what she claimed because many people will do this wrong and end up screwing over the other parent.

IRS Publication 503 has more information on the matter:

 

Child of divorced or separated parents or parents living apart.

Even if you cannot claim your child as a dependent, he or she is treated as your qualifying person if:

*The child was under age 13 or was not physically or mentally able to care for himself or herself,

*The child received over half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the calendar year,

*The child was in the custody of one or both parents for more than half the year, and

*You were the child’s custodial parent.

 

Custodial Parent Claiming Child Credit on Taxes

The custodial parent is the parent with whom the child lived for the greater number of nights in 2013. If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. For details and an exception for a parent who works at night, see Publication 501.

The noncustodial parent cannot treat the child as a qualifying person even if that parent is entitled to claim the child as a dependent under the special rules for a child of divorced or separated parents.

 

Joint Tax Refunds Married Couples

What happens when a couple files a tax return as married and then divorces?

It is possible to split a tax refund after a couple who is previously married later files to divorce. There could be many reasons when they want to split the tax refund after being married. When married couples divorce or separate, or when a dispute exists as to how much of the refund each is entitled to, Revenue Ruling 80-7 provides a formula for determining each spouse’s share of the refund and allows the IRS to issue separate refund checks to each party.

Joint Tax Refunds Married Couples

This is a somewhat complicated tax situation and it is recommended that the affected parties seek help of either a CPA or tax lawyer to aid in filing the 1040X for this divorcee tax situation. If the parties cannot decide after negotiations on how to divide the refund, either spouse may request that the IRS issue a separate refund check by filing Form 1040X, Amended U.S. Individual Income Tax Return, and making the computation required by Revenue Ruling 80-7.

 

Filing Form 1040X to Amend Tax Return

The IRS will accept a joint 1040X with only one signature from a divorced or separated taxpayer requesting a separate refund check. The worksheet on the back of Form 8379, Injured Spouse Allocation, can guide a taxpayer through the computation required to split a tax refund check from taxpayers who filed joint tax returns

It is necessary to file Form 8370 and attach the form to your amended return. Legally, the refund belongs to the spouse whose income, deductions, and tax payments produced the refund as shown on the tax return. Filing jointly  as a married couple does not change who is entitled to the tax refund. Filing jointly only determines the amount of tax a couple has to pay. Therefore, it is perfectly acceptable and not too hard for the IRS to figure out how to issue separate refund checks to spouses.

Choosing a Tax Filing Status

There are several different types of tax filing statuses that people must be aware of and use correctly when filing their tax return. A taxpayer can select a tax filing status by checking the appropriate box directly below their name on page 1 of Form 1040 or Form 1040A. The IRS form says says “Filing Status”

 

Types of Tax Filing Statuses

The following lists the main types of tax filing statuses:

  • Single
  • Married filing jointly
  • Married filing separately
  • Head of household
  • Qualifying widow(er) with dependent child

The type of filing status is important because it can lead to different tax rates and benefits. The next section will address each type of tax filing status briefly.

 

Single Tax Filing Status

The simplest explanation is that people who are not married will file taxes as “single.” The IRS does not recognize couples living together. You must get married to get the benefits of the marital tax bracket.

If you live in a state that recognizes civil unions and same-sex marriage and you have legally entered into one of these unions, although you’re still required to use the single or head-of-household filing status for your federal return, you must use either the married filing jointly or married filing separately status for your state income tax return.

 

Married Filing Jointly Tax Filing Status

Married couples will be required to file jointly with their spouse and share the tax responsibilities.

You can file your taxes as married filing jointly if you meet any of the following criteria:

  • You were married as of December 31 of the tax year even if you didn’t live with your spouse at the end of the year.
  • Your spouse died in the tax year , and you did not remarry someone else in the tax year. If your spouse died during the year, you’re considered married for the entire year. It is necessary to report all your spouses income and can take their deductions.
  • Your spouse died in the next tax year, but before you filed a previous tax year return.

A couple legally separated under a divorce decree may not file jointly.

 

Married Filing Separately Tax Status

Sometimes people are hurt by the marriage penalty and chose to file their taxes separately. To determine whether filing separately is a benefit, it is advised to calculate your as if you married filing jointly and married filing separately. There are several restrictions based on married filing separately that every taxpayer should consider.

Instead of filing separately, a taxpayer may be able to file as a head of household if you had a child living with you and you lived apart from your spouse during the last six months of the tax year.

After filing a joint return, you cannot go back and amend your return to the married filing separately status.

 

Head of Household Tax Filing Status

Under the head of household tax filing status rules, you may file as head of household if you were unmarried, or separated and considered unmarried at the end of the year, and you paid more than half of the cost of a maintaining a home that either:

  • Was your parent’s main home for the entire tax year, provided you can claim your parents as your dependent. Your parent didn’t have to live with you in your home.
  • You lived in for more than half of the year (temporary absences, such as for school, vacation, or medical care, count as time lived in your home) with any of the following

* Your qualifying child

* Any other person you can claim as your dependent.

* Your qualifying married child, but only if he or she doesn’t file a joint income tax return with his or her spouse, and only if that child is a U.S. citizen, U.S. national, or a resident of the United States, Mexico, or Canada.

 

Qualifying Widow with Dependent Child

If you meet all five of the following tests, you can file as a qualifying widow with dependent child and use the tax table for married filing jointly:

  • Your spouse died within the 3 preceding tax years and you did not remarry in the previous tax year.
  • You have a child, stepchild, adopted child, or foster child whom you can claim as a dependent.
  • This child lived in your home for all of the tax year. Temporary absences, such as for vacation or school, count as time lived in your home.
  •  You paid more than half the cost of keeping up your home for this child.
  • You could have filed a joint return with your spouse the year he or she died, even if you didn’t actually do so. (But you can’t claim an exemption for your deceased spouse.)

 

Married Taxpayer filing taxes as single taxpayer or head of household

It is possible to file as a single taxpayer, preferably using head of household rates, even though you are legally married to another person. However, in order to be legally married and file as a single taxpayer, certain rules must be met:

 

If the following tests are met, you can file as “single” or “head-of-household” even though you’re married. 

  • You maintain as your home a household which for more than half the year is the principal living place of a child of yours whom you can claim as your dependent (or could have claimed as your dependent except that you signed away your right to the exemption to the child’s other parent).
  • Your furnish more than half of the cost of maintaining the home. This includes all house-related costs, plus the cost of food consumed in the home.
  • Your spouse cannot have been a member of the household for the last six months of the year.

 

“Married Filing Separately” Filing Status

If you pass this test, this means that a taxpayer will not have to use the unfavorable “married filing separately” filing status. Note that if both you and your spouse meet these tests, for example, you have more than one child and each has custody of a child, both of you can qualify to file as unmarried taxpayers. If only one meets the tests, then the other, nonqualifying, spouse will have to file as married filing separately.

 

Married Taxpayer filing taxes as single taxpayer or head of household

It is important to remember that a married taxpayer can always use the filing status “married filing separately.” However, it is less favorable than the “single” or “head of household” filing statuses because there are not as many advantages to the married filing separately status.

In many cases a couple is “separated” but with no decree of divorce or separate maintenance. In that case, they are still considered to be married in the eyes of state law and tax law because the tax law follows the state laws.  The couple can still file “jointly,” but this may be impractical in some cases depending on the nature of the separation.

Deductible Legal Fees in Divorce

How to deduct legal fees in divorce?

Legal fees in connection with a divorce or separation are treated specially for tax purposes. The overall rule regarding the deductibility of legal fees in divorce are that general legal fees relating to a divorce or separation are nondeductible personal expenses. However, with careful planning and careful documentation on the attorney’s part, a portion of the fees may be deductible under one or more of the following approaches to planning for legal fee deductions.

 

Deductible Legal Fees in Divorce

You cannot deduct the costs of counseling, litigations, or personal advice. However, in some circumstances, taxpayers are permitted to deduct fees that are associated with the collection of alimony payments.

 

Divorce Legal Fee Deductions

  • Capitalization of legal fees. To the extent legal work is involved in acquiring marital assets in a divorce or separation, the allocable part of the fee can be added to the basis of the assets acquired. While this is not as favorable as a deduction, it should save taxes when the assets are eventually disposed of.
  • Tax advice. The payment of legal fees for tax advice is deductible as an itemized deduction. In many divorces and separations, the tax aspects of divorce play a key role in the arrangements made. Tax consequences must frequently be analyzed and explained to the parties. A lawyer that has itemized bills for this means that a client may be able to deduct it on their tax returns.
  • Collection of taxable alimony. Legal fees incurred for the collection of taxable income are deductible. Taxpayers can deduct that portion of legal fees in divorce relating to getting alimony. This covers the legal work involved in setting up the alimony payments. This could mean deducting the fees related to drafting the divorce or separation agreements. It also covers the legal fees incurred to enforce collection, if payments are missed or there are other issues.Remember though, that legal fees incurred by the paying party to resist alimony claims are nondeductible personal expenses.

One of the most difficult elements in obtaining tax benefits from legal fees in connection with divorce is showing which part is deductible. The taxpayer must be able to show the portion of the legal fees deductible. If one bill is provided with no details, the legal services will not be taxable.

 

The following advice and services may be allocated to tax planning

1. Costs of structuring a property division to produce desired tax effects, i.e., advice re: rollover residence, the one-time tax exclusion of capital gain for taxpayers 55 and over, etc.
2. Costs of determining the adjusted basis of assets in the property settlement.
3. Costs of planning an alimony trust or annuity agreement to avoid some of the restrictions on deductible spousal support.
4. Costs of estate planning that assure proper estate and gift tax consequences for the payment or receipt of support or property division.
5. Costs of preparing a settlement agreement to assure deductible support payments during the separation period.
6. Costs of maximizing the deductible portion of spousal support or of minimizing the taxable portion of spousal support.
7. Costs of allocating dependency exemptions.
8. Costs of obtaining advice regarding the tax consequences of divorce or separation instrument or of gathering information for and preparation of tax returns.
9. Costs of drafting a QDRO and submitting it to the plan administrator for approval and enforcing the QDRO. (These may also be deductible as fees incurred to produce taxable income.)

The best approach is to make an attorney separate out, document, and itemize the time spent on each of the above three categories and to itemize the bill.

Tax Return Filing Status During Divorce

How should a taxpayer file their tax return during a divorce? 

Should a taxpayer file a single, joint, or married filing separately-for federal income tax purposes during the pendency of your divorce/separation proceedings? There are many tax considerations to a divorce that taxpayers should be aware about and filing status is one of them. Making smarter decisions at this stage of the divorce will be very beneficial to taxpayers down the road and could save both parties to a divorce and headache.

Tax Return Filing Status During Divorce

The main IRS rule is that filing status depends on your marital status, and your marital status depends upon your status under state law.

At the end of the year, if there has been issued a “final” decree of divorce or you are legally separated under a “final” decree of separate maintenance, then you are no longer married and must file as a single person. The only exception may be is if you live with one or more children and pay more than half the cost of running the household. If this is the case, one may qualify for head of household filing status which has several tax advantages.

 

Determining Filing Status During Divorce

The key to determining filing status is checking to see if there is a final divorce decree from the court and understanding what exactly is says. This will also largely depend on state divorce law.

At the end of the tax year, if there has been no “final” decree of divorce, annulment or separate maintenance, then you are still considered as married. This is the truth even if you are separated from your spouse under a separation agreement or a non-final court decree.You therefore must file either a joint return or as a married individual filing separately. This could have several disadvantages

 

Special rule permits you to be treated as unmarried for filing status during divorce if:

  • you don’t file a joint return for the year;
  • you maintain as your home a household which, for more than half the year, is the principal residence of a child;
  • you furnish more than half of the cost of maintaining that household; and• during the last six months of the year, your spouse isn’t a member of that household.

Even if you can file jointly under the above rules,  you still may want to file separately. If you made deductible alimony payments, you must file a separate return in order to claim the deduction. The alimony deduction cannot be taken on a joint return.

 

Liability under IRS Audit during Divorce

Also, both spouses are generally liable for the tax if a joint return is filed and any representations made on the tax return. Under an IRS audit,  you could be liable for all the additional tax, interest and penalties even if the problems with the return are solely related to your ex-spouse.

If something bad happens, you may be relieved of liability for a tax understatement that is attributable to erroneous items of your spouse if you didn’t know or have reason to know about them, meet some other requirements, and elect relief within two years after IRS first tries to collect the tax from you. There is also special relief for innocent spouses that may apply to this type of unique situation.

There are several important things to remember about filing taxes and divorces. Once the divorce or separation agreement is finalized or you and your spouse have not resided in the same household for a full year, taxpayers also may file an election to limit liability for joint returns already filed to the portion of the tax deficiency that is allocable to you.

 

Divorce tax election

There are several requirements related to the divorce tax election. To qualify, you must not have actually known of the deficiency when you signed the joint return, and elect this relief no later than two years after IRS begins collection activities. Divorcing spouses should make this election as soon as they are eligible to if there has been an understatement of tax on a joint return.

Change in Divorce Decree and Change in Alimony

Change in Alimony Information

It is important to take tax considerations into any changes ex-spouses intend to make in support or alimony agreements or decrees. A change in a divorce decree could significantly change the amount of an alimony deduction.

 

Change in Divorce Decree and Change in Alimony

If you agree to increase what you pay for alimony, it is important to remember that you cannot just make additional payments and deduct them. All of the changes must be properly placed into a divorce decree.

 

Modification of a divorce decree

A modification of a divorce decree would be needed to make any additional payments or increases in spousal support or alimony deductible as alimony. Payments that you aren’t legally obligated to make as alimony or spousal support under a currently effective written separation agreement or decree providing for spousal support or alimony cannot be deducted by you as alimony and aren’t taxed to the recipient spouse. Any voluntary payments might also subject you to gift tax.

It is important to make sure that any changes are legally enforceable and required by law to ensure a proper deduction for alimony on a tax return.

 

IRS Requirements for Alimony Change

Even if you were to enter into a written, legally sufficient modification, you would want to be sure that the agreement, as modified, met all the IRS requirements for the deduction. Again, failure to ensure that all requirements have been met can have drastic and hidden tax consequences.

Lastly, it is vitally important that all payments under a modified decree clearly end at the death of the recipient spouse, and that spousal support or alimony be clearly distinguished from child support.

Deducting Alimony Divorce Tax Rules Deductions

Information about Deducting Alimony on Tax Return

Divorced taxpayers are subject to several different sets of tax laws that will affect how certain payments made pursuant to a divorce decree are deducted. Very careful planning by the divorce attorney is needed to ensure that the proper alimony deductions will lead to the greatest tax benefit. Alimony is a payment to or for a spouse or former spouse made under a divorce or separation instrument.

 

Deducting Alimony Divorce Tax Rules Deductions

Alimony is deductible by the payor and includible in the income of the payee spouse or former spouse. Code Sections 71(a) and 215(a). References to “spouse” and “former spouse” may be used interchangeably. Alimony income and the alimony deduction are reported on IRS Form 1040 for federal income tax purposes. State laws should be checked (particularly those states with an “independent” income tax system that does not “piggyback” the Federal system) to determine if alimony is deductible by the payor and includible as income by the payee.

 

When are alimony payments deductible?

In tax terms, alimony payments are deductible only if they meet the requirements outlined by the IRS below. It is important to have your divorce decree or separation agreement reviewed for tax purposes before it becomes effective to make sure these requirements are met. Most divorce attorneys should understand how important tax planning is in divorce and set up legal documents to support deductible alimony payments. It is important to remember that even if the divorce decree states that a payment is considered alimony, it will not be deductible for tax purposes until it meets the specific IRS Alimony Requirements.

 

Here are the alimony requirements in a divorce decree in order to have alimony deductible for tax purposes:

  • No voluntary payments: For an alimony payment to be deductible, it must be required by a divorce or support decree or a written separation agreement. it cannot be voluntarily given from one person to another. Failure to make a payment will be breaching the legal divorce contract.
  • Payments to stop at death: For the payments to qualify as alimony for tax purposes, the payments must be required to stop when the spouse dies. Note: if the payments are to continue after the spouse dies, then none of the payments-including those made while the spouse is alive-are deductible as alimony for tax purposes.
  • Cash only: Only payments of cash qualify as deductible alimony. The cash can be paid either directly to the spouse or can be paid on the spouse’s behalf under the terms of the instrument to cover an expense such as rent or the mortgage.Property given to one spouse to another will not qualify as deductible alimony payments under tax laws
  • Separate living arrangements: If you’re making payments under a divorce decree, you must be living apart from your spouse for the payments to qualify as alimony. The IRS can check this by addresses on the tax return and during an IRS audit
  • Child Support is Different: Payments made for child support are not deductible for tax purposes.  This includes payments clearly fixed in the divorce decree as child support. It also includes, however, payments which the instrument calls alimony but which are linked to a contingency relating to the child. There are special rules that are meant to address this issue and the IRS will enforce this on audit.

 

Alimony vs. Child Support for Tax Purposes

Getting your spouse to agree to take alimony instead of child support can cut your taxes substantially. However, this might not be as easy as it sounds because the alimony is included in the spouse’s taxable income while the child support is not. Amounts will need to be grossed up in order to make sure that there is tax efficiency between the divorced couple.

In divorce negotiations this is a critical fact and can determine how much is paid in alimony and how much is paid in child support. There may be significant tax planning opportunities available to each parent depending on their income and job situation. A tax lawyer may be required to help plan for different contingencies. Getting proper planning now on alimony vs. child support for tax purposes will surely pay off in the future. The alimony recapture rule exists to prevent taxpayers from “disguising” otherwise nondeductible property settlement payments as alimony payments by attempting to “front-load” and deduct property settlement payments that are purportedly characterized as alimony.

Remember, if you are the recipient of alimony, you must report the full amount as income on your tax returns. Failing to report alimony is very likely to result in an IRS audit. Remember: Since the alimony paid is a tax deduction for the payor, the IRS can easily determine how much alimony you received.

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Tax Tips for Recently Married Taxpayers

Few changes in life affect your taxes as significantly as beginning or ending a marriage. These Q&As may be helpful if you have been recently married or divorced. In most cases, you pay less tax by filing jointly. You do not qualify for certain tax breaks, or your tax breaks may be limited, if you use the Married Filing Separately filing status. For example, you cannot take education credits, the student loan interest deduction, or the rental real estate loss allowance if you lived together and file separately. Also, you cannot take the Child and Dependent Care Credit or the Adoption Credit if you file separately, unless you lived apart for the last six months of the year.

Tax Tips for Recently Married Taxpayers

Married Filing Separately (MFS) taxpayers are only responsible for their income and taxes (and not for a spouse), but may not be eligible to claim the following tax benefits:

  • Tuition and fees deduction
  • Student loan interest deduction
  • Tax-free exclusion of US bond interest
  • Tax-free exclusion of Social Security Benefits
  • Credit for the Elderly and Disabled
  • Child and Dependent Care Credit
  • Earned Income Credit
  • Education Credits

 

Other drawbacks of Married Filing Separately:

  • Taxpayers have a much lower income phase-out range for IRA deductions.
  • Both spouses must claim the standard deduction, or both must itemize their deductions. One spouse cannot claim the standard deduction if the other is itemizing.
  • This filing status generally pays the most tax of all the filing statuses.

If you have recently gotten married or plan to get married in the near future, the IRS has some tips to help you avoid stress at tax time.

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  1. Notify the Social Security Administration: Report any name change to the Social Security Administration, so your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site at www.socialsecurity.gov, by calling 800-772-1213 or at local offices.
  2. Notify the IRS: If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 below or order it by calling 800–TAX–FORM (800–829–3676).
  3. Notify the U.S. Postal Service: You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence.
  4. Notify Your Employer: Report any name and address changes to your employer(s) to ensure receipt of your Form W-2, Wage and Tax Statement after the end of the year.
  5. Check Your Withholding: If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will even provide you with a new Form W-4, Employee’s Withholding Allowance Certificate you can print out and give it to your employer so they can withhold the correct amount from your pay.

Bottom line: planning for your wedding may be over, but don’t forget about planning for the tax-related changes that marriage brings. More information about changing your name, address and income tax withholding is available on IRS.gov. IRS forms and publications can be obtained from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

 

Additional IRS Links on the Tax Consequences of Getting Married:

 

YouTube Video on Getting Married and Taxes: