Tag: divorce tax

Divorce Stimulus Checks and More Good Coronavirus News

Posted by Ron Kauffman on

If you have not already received it (and spent it shopping), your Economic Impact Payment may be on its way. But if you’re separated or going through a divorce, your economic stimulus check may not be as stimulating as you had hoped. As always, there’s also some good coronavirus news.

Divorce Stimulus Checks

A Stimulating Divorce Issue

Since the President signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), the $2 trillion stimulus package to spur the economic recovery, millions of Americans have already received their Economic Impact Payments and are busy shopping.

You may be eligible to receive a payment if you are a U.S. citizen, permanent resident or qualifying resident alien, cannot be claimed as a dependent on someone else’s tax return, have a Social Security number and an adjusted gross income below a certain amount.

Qualifying single adults who have an adjusted gross income of $75,000 or less will receive $1,200. Married couples with no children earning $150,000 or less will receive a total payment of $2,400. Taxpayers filing as head of household will receive full payment if they earned $112,500 or less.

But will the stimulus funds be impacted because you are in a divorce or family law case?

Florida Divorce and Tax

I’ve written about divorce and taxes before. For example, after the new tax code changes became law, it eliminated the alimony deduction. Many people criticized the tax law change in general. For example, the decision to end the alimony deduction received a lot of criticism. Many argued it made divorce worse.

Since the change, we’ve seen that some people are not willing to pay as much in alimony. This reduction in alimony amounts being paid has disproportionately hurt women, who have tended to earn less, and are more likely to be on the receiving end of alimony payments.

Who CARES?

For everyone who has not received it, the stimulus payment checks are something being counted on every day. Fortunately, most people should expect to receive their one-time, $1,200 stimulus payment from the IRS in the next few weeks. However, some people may receive less than they expected.

For example, if you have not filed your 2019 tax return, the IRS will calculate your payment based on the adjusted gross income listed on your 2018 tax return.

Also, if you have a pending divorce case, the payment will be deposited into the bank account that was provided to the IRS on your previous tax return. So, if your last tax return was a joint return prepared with your spouse, you may have to consult an attorney to discuss your options for recovering your payment.

Don’t forget you may also receive an additional $500 stimulus payment for each qualifying child. For anyone who filed jointly with their spouse, and whose custody arrangement has changed since they last filed a tax return, the portion of the check allocated for qualified children may be impacted.

Finally, the rules for child support enforcement are still in effect. Federal law requires child support agencies to collect past due child support from federal tax refunds.

In passing the federal CARES Act, Congress did not exempt the stimulus payment checks from federal offsets for unpaid child support arrears. All or a partial amount of your stimulus check may be intercepted and used to pay unpaid child support.

Good Coronavirus News

As we enter summer, there is good coronavirus news. More and more cities have decided on timetables for reopening certain parks and recreational facilities as part of a phase of returning to normal during the coronavirus pandemic.

  • In Miami, parks, boat ramps, golf courses and other facilities will open with certain restrictions.
  • Face coverings must always be worn unless otherwise noted.
  • Social distancing must be observed, and there can’t be gatherings of 10 or more people.
  • Sadly, swimming pools are not being opened for adult lap swimming. This critical policy misstep – to open swimming pools to adult lap swimming – is a major oversight mayors around the state seem to be making, and will need to be corrected in the future.

The IRS economic impact payments information page is here.

 

Divorce and the Marriage Penalty Tax

Posted by Ron Kauffman on

Unmarried couples face many costs, hurdles, and issues, but not the tax married couples pay simply because they tied the knot. The good news is Congress repealed some marriage penalties. The bad news is it retained others and added more, making divorce and the marriage penalty tax news again.

Divorce and the Marriage Penalty

The Marriage Penalty

We call a marriage penalty any time a married couple pays higher income taxes than they would have paid if they were un-married and filed individual tax returns.

The Tax Cuts and Jobs Act of 2017 definitely lowered the cost of being married for many couples. But being married can be more expensive than being two single tax filers on April 15th. For example, if a couple has children and both spouses earn income, they can owe thousands of dollars every year just for being married.

Disparity in Incomes

I’ve written about divorce and the marriage tax penalty before. A common complaint about our tax code is a difference between couples that have similar incomes and couples in which one partner earns much more.

For another example, a couple whose incomes are far apart often pay less if they’re married, while couples whose earnings are more evenly split often pay the same as or more than two singles.

Say that two couples each have total income of $225,000 and no children or itemized deductions. In the first couple, one partner earns $210,000 and one earns $15,000. If they marry, they’ll save about $8,400 compared with filing as two singles.

In the second couple, one partner earns $145,000 and the other earns $80,000. Being married will save them about $300 compared with filing as two singles.

Things change if each couple has two young children and typical deductions for mortgage interest, state taxes and charity. The couple with one high and one low earner has a marriage bonus, although it drops to about $3,200.

The second couple now has a big marriage penalty. They owe about $4,000 more than they’d pay as two single filers—just for one year. Having a $50,000 capital-gain windfall would add nearly $1,000 to their penalty.

SALT and Taxes

In a system that imposes higher rates as income rises, like ours, it’s impossible to tax married couples based on their total income regardless of who earns it while also taxing married couples so they owe the same as two single people.

The U.S. system creates marriage bonuses and penalties. Other countries avoid this by taxing married couples as two individuals shifting to such a system could be difficult in the U.S., in part because of community-property laws in some states.

The Tax Cuts and Jobs Act of 2017 repealed some marriage penalties and broadened some tax brackets, helping many two-earner married couples. But it retained other marriage penalties and added more.

One is the new $10,000 limit on deductions for state and local taxes, such as your property tax bill, known by the acronym “SALT”. This limit on deducting your property tax bill is by return, so married joint filers who list deductions on Schedule A get only a $10,000 write-off, while two single filers living together get a $20,000 write-off.

Affluent married couples hoping to buy a home in expensive areas could also feel a pinch. The overhaul dropped the maximum mortgage debt that’s eligible for an interest deduction on new purchases to $750,000 from about $1 million, and the limit is per return.

So, an unmarried couple can deduct interest on $1.5 million of mortgage debt, while the limit for a married couple is $750,000.

For couples contemplating marriage, estimating the tax cost can be hard. One reason is that marriage penalties often vary over time. For example, a two-earner couple may not owe a penalty when they are first married. If they become a one-earner couple when they have children, they may get a marriage bonus.

Changes

The marriage penalties removed by the 2017 law will return after 2025 if Congress doesn’t act before then. Another complication is that the U.S. tax code provides marriage bonuses, even to couples who owe marriage penalties.

Unmarried couples also face problems. They may pay more for health coverage, and they have to prepare two tax returns. They’ll need to take special care with health proxies, powers of attorney and other legal documents that married couples don’t face.

Divorce and Taxes

Since the marriage penalty is where a married couple pays higher income taxes than they would have paid if they were un-married and filed individual tax returns, should you divorce to avoid this penalty?

Divorce is a lot harder than getting married. And the Internal Revenue Service for decades has had the power to disregard divorces that are solely for tax reasons.

The Wall Street Journal article is here.

 

Divorce Time Flies

Posted by Ron Kauffman on

The New York Times is the latest media outlet noting that a new tax law – that took effect in January – has added a new urgency for many Americans contemplating divorce. Why would a new tax law have such an impact on divorce?

divorce time

Beat the Clock

As the New York Times article notes, several key changes in the tax law may determine whether it is better to complete or update a divorce agreement by Dec. 31st or wait until the new year.

One of the biggest changes affects alimony, which will not be a tax break for Americans after this year. The new tax law is also causing parting spouses to look more closely at benefits for their children and the values of privately owned businesses and partnerships.

In the Nick of Time

I’ve written about the area of divorce and taxes before, but the Times article notes four areas that couples considering a divorce should examine before the end of the year:

Alimony

As many people have heard, the tax law is going to turn the calendar back on alimony. 77 years in fact. That was the year the Revenue Act of 1942 first made alimony deductible for the spouse paying it and taxable for the spouse receiving it.

The new tax law could become a problem in divorces settled after December 31, 2018, because under the new law, the alimony payer will be taxed on the full amount while the recipient will pay no tax on it.

Prenuptial Agreements

It is common in prenuptial agreement to have language calculating alimony payments based on years of marriage, and a clause saying alimony payments are deductible for one spouse.

In the absence of guidance from the I.R.S., a document calling for deductible alimony might not be honored if alimony is no longer deductible.

Business Valuations

Business valuations have always been an important component of divorce. The new tax law increases the cash flow of certain pass-through entities — businesses where the taxes are picked up by the owner, not the company — in a way that raises their value.

However, a higher cash flow – because of the change in the tax law this year  – may not be known until the business owner files a tax return next year.

Other Assets

Should you ask for the house or retirement? The new tax law, particularly in states where deductions for high state and local taxes have been capped, may make the home less valuable than a retirement account with a similar value.

Spouses who get the retirement account will not be able to draw down on it until age 59½, but they will have a more solid financial base in their later years. And by opting for the retirement account over the house, they can avoid paying those property taxes.

The New York Times article is here.