As the New York Times reports, divorce can be a business negotiation. Harsh as that may sound — especially if there are children being fought over — when a couple gets to a final hearing or mediation, numbers matter. There are some divorce tax strategies you should know about involving the home, alimony, and even the time allotted with children.
New Tax Code
Divorce negotiations are never easy, but they became even more complicated this year after the sweeping overhaul of our tax code changed many of the calculations that factor into the logistics of divorce.
The most sweeping tax legislation since 1986 was signed into law in 2017 and are only now taking effect. The Tax Cuts and Jobs Act makes reductions to income tax rates, reduces the income tax rate for corporations and pass-through entities like Sub-S corps and LLCs.
The revised tax code has brought some surprises to couples going through a divorce too, and many lawyers are suggesting that clients bring accountants into the divorce team to lay out the tax implications of age-old strategies.
Nothing is Certain: Divorce and Taxes
I’ve written about divorce and taxes before. The new tax code changes will impact your divorce, but the alimony deduction change may not be the only tax change which you should take into consideration in your divorce.
Many people are criticizing the new tax law in general. For example the decision to end the alimony deduction receives a lot of criticism. Many are saying it made divorce worse.
People won’t be willing to pay as much in alimony, which will disproportionately hurt women who tend to earn less and are more likely to be on the receiving end of alimony payments.
On the other hand, the alimony deduction itself has also been criticized. For example, the government argues the deduction is a burden on the IRS because, if the alimony amounts ex-spouses report paying and receiving don’t match, it can force the agency to audit two people who may already be feuding.
So, what are some of the new divorce ax strategies to consider with the changes to the tax code?
Everyone involved in divorce has been talking about what happened to alimony and taxes. Last year I was warning clients in the midst of their divorces to hurry things up because of the new tax law changes which made alimony not deductible anymore. But like love, divorce cannot be rushed.
For divorces completed this year, and in the future, the spouse paying alimony can no longer deduct the alimony from taxes while the spouse receiving the money no longer has to claim it as income.
The loss has made alimony payments more costly to the paying spouse because it eliminated a tax break that often served as a reason to bring about an agreement by taking off the sting of alimony payments.
The new tax law’s restrictions on deducting state and local taxes (the so-called “SALT” deductions) surprised many who saw their tax bill go up. When it comes to divorce, that limitation on deducting your real estate taxes can turn your home into a hot potato.
Usually, the spouse with less money would often want to keep the marital home for the children, but doing so now has become more costly.
In high-property-tax states, some divorcing couples are looking to get rid of second homes as well. Some states further complicate the process by having a set of standards that were created when alimony and state and local taxes were deductible on federal tax returns. While the SALT deductions have changed, the standards have not.
The tax value of children in a divorce was also changed in the tax overhaul. In financial terms, children have become a smaller deduction.
The exemption for each dependent — $4,050 per person — was eliminated, but the child tax credit was increased to $2,000.
That credit starts to phase out at $200,000 of income for an individual and disappears at $240,000. This can impact you because the credit can be given to the spouse with lower income in exchange for a break elsewhere in the negotiations.
The New York Times article is here.