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Tax Cuts and Jobs Act and miscellaneous divorce expenses in Texas

Hey there, fellow adventurers in the realm of taxes and divorce! Welcome to a rollercoaster ride that promises twists, turns, and maybe even a few loop-de-loops! Today, we’re diving into the fantastic world of tax cuts and jobs act alimony. Picture this: you’re sipping your favorite coffee, surrounded by piles of paperwork, and suddenly, the topic of dividing assets in a divorce pops up. The excitement is real! But fear not, dear reader, because we’ve got your back.

So, why is this such a big deal? Well, imagine you and your soon-to-be-ex-spouse are splitting up. Drama aside, you’ve got to figure out what happens to your retirement accounts, stocks, and that little side hustle you started together. Sounds like a wild ride, huh? But fear not, we’re here to guide you through this thrilling adventure of untangling the crazy knots of tax implications during a divorce.

Deciphering the Tax Maze of Divorce: An Entertaining Survival Guide

Short Answer: What’s the deal with taxes and divorce? Brace yourself for a wild ride as we explore how the Tax Cuts and Jobs Act can turn your world upside down! From the impact on your filing status to the fate of personal and dependent exemptions, we’re leaving no stone unturned. And guess what? We’ve got real-life stories, juicy case studies, and helpful tips to keep you engaged throughout this exhilarating journey!

Get ready to laugh, learn, and maybe shed a tear or two. But hey, who said taxes and divorce couldn’t be entertaining? Join us as we unravel the mysteries. We’ll provide you with the ultimate survival guide for navigating the taxing world of divorce. So buckle up, grab some popcorn, and let’s embark on this extraordinary adventure together! Trust us; it’s going to be a blog post for the ages!

Divorce and Taxes – Untangling the Crazy Knots!

There are many reasons to get a divorce. Getting a break on your taxes due to the benefits attached to divorce is usually not at the top of anyone’s list. I have been working with families going through a divorce for quite some time, and I have not heard one single person tell me that their primary motivator to getting a divorce was to take advantage of the tax benefits of doing so. Go figure.

We all know that getting a divorce is not fun. It is a stressful time that often involves moving out of the family home and adjusting to living life on a single income. These are just a few of the transitionary elements to going through a divorce in Texas. If you are fortunate enough to be a parent, you are undoubtedly concerned about the transitions inherent in raising a child during and after a divorce. How is your child going to respond to the case and its changes? Will your relationship with your child suffer as a result of the divorce? Will you be able to co-parent with your soon-to-be ex-spouse effectively?

Financial and Tax Considerations in Divorce: Navigating Texas Laws and Implications

There are also important financial considerations in getting a divorce. The community property laws in Texas and the prospect of paying spousal maintenance after a divorce are frequently concerned people like yourself have as they get involved in the divorce process. You may have heard exaggerated stories about these subjects, causing concern about the outcome of your case. Are you going to be in a financial hole that you are unable to dig out from under?

Everyone’s favorite subject, taxes, also plays a role in the divorce process. Due to the Winter Storm that we had in February of this year, Texans have an extended deadline to file and pay taxes for 2020 on June 15, 2021. This blog is not intended to act as tax advice. I am not a professional in the area of taxes. If you have any questions about tax law, federal income taxes, or a subject surrounding taxes, your best bet is to speak to a person in that field. Today’s blog will focus on taxes and divorce but is not tax advice (or legal advice, for that matter).

Alimony and spousal maintenance- is it tax-deductible any longer?

In 2017, the Tax Cuts and Jobs Act was signed into federal law by President Trump. This law changed the tax code that may have significant impacts on your life and how your divorce will proceed through the settlement process. Most notably, alimony payments are no longer deductible on your federal income taxes. In Texas, there are two types of alimony. First is spousal maintenance as ordered through a divorce trial. And second is contractual alimony negotiating between you and your spouse in mediation.

Depending on the length of your marriage, you may be in line to pay special maintenance for periods lasting anywhere from 5 to 10 years. The dollar value of the special maintenance every month can be no more than $5000 or 20% of your average monthly gross income. If you were not married to your spouse for at least 10 years, no spousal maintenance could likely be ordered in your circumstances.

On the other hand, contractual alimony is more of an agreement between you and your spouse created in mediation. The purpose of contractual alimony is a good faith effort to avoid going to court and solidify your agreements regarding the division of Community property. It ensures both you and your spouse can provide for yourselves financially after the divorce.

Changes to Alimony Tax Treatment in Texas: Impact and Considerations

Until the passage of this law in 2017, alimony and spousal maintenance in Texas were treated as deductions from your gross income if you were to be the spouse who was obligated to pay the alimony. Conversely, the spousal maintenance or alimony payments would have been treated as income by your ex-spouse. However, as of the beginning of 2019, alimony and spousal maintenance payments were no longer eligible for deductions. By the same token, your ex-spouse would no longer have to treat these spousal maintenance or alimony payments as taxable income.

As far as timing is concerned, the key thing is that if you entered into an agreement for contractual alimony or had a spousal maintenance order issued before 12/31/2018, then your orders are treated as being under the old set of laws. Many people going through a divorce may perceive the change in the law since 2018 as a reason to avoid divorce altogether or to reconsider including spousal maintenance or alimony in their divorce settlement.

The reason being is that if you were to pay spousal maintenance or alimony, then it is likely that you would be the spouse who earns more money and pays more in taxes as a single person. Therefore, paying spousal maintenance or alimony would result in a deduction that might push you into a lower tax bracket, potentially saving you money on overall taxes each year. You may not mind paying a larger sum in alimony or maintenance if you can then write the money off on your taxes each year.

What about the child tax credit?

For many years, families like yours were able to take advantage of a dependency exemption which allowed you to make exemptions from your taxable income based on the number of children in your care. A child tax credit was also (and still is) a mainstay for families to incorporate into their tax planning for minor children. The Tax Cuts and Jobs Act allows you to take advantage of a per-child credit of $2,000, whereas the figure previously was only $1,000. More families are eligible to take advantage of these tax credits. The income threshold of doing so has risen dramatically both for single and joint filers due to this law coming into place.

If you are familiar with our blog here on the website of the Law Office of Bryan Fagan, then you know that in a divorce, there are typically two different types of parenting roles that you may take on after the divorce as far as conservatorship is concerned. The first is as a primary conservator who determines the children’s primary residence and receives child support. They generally hold more exclusive or independent decision-making capabilities for the kids. The second conservatorship role is that of a possessory conservator who has visitation rights with the kids and holds many, though not all, of the same rights about the children as the primary conservator.

Tax Considerations for Divorced Parents: Claiming Children as Dependents

Many parents wonder if the possessory conservator can claim their children on their taxes post-divorce. They seek to receive a credit for doing so. The dependency exemption that we discussed earlier can be applied to either your or your co-parent’s tax return after a divorce. Many parents like you may be anticipating a negotiation session over which parent “gets” to claim the children on their taxes each year after the divorce.

What does be The IRS has to say about claiming children as dependents on your taxes?

HOWEVER, the IRS has issued guidance on this issue since the passage of the Tax Cuts and Jobs Act. To begin with, a child may be the dependent of only one parent- you or your ex-spouse- in any given tax year. This is an important distinction to make given that I have encountered some parents operating under the impression that each parent would be able to claim their child as a dependent on their yearly taxes.

Generally speaking, so says the IRS, your child will be the qualifying child (who allows you to take advantage of the child tax credit) as a dependent if they live with you primarily during the year. Therefore, applying that to Texas family law, whoever is the primary conservator of your child would be able to take advantage of the child tax credit. This is because your child would be living for a longer period during the year with that particular parent.

However, the noncustodial parent can be treated as the qualifying child if a special rule applies. This rule requires, in part, that both of these following conditions are met in your circumstances: that your Co-parent would have to sign a tax form that releases or revokes the ability to claim the child on their taxes as the custodial parent. Additionally, you would need to attach that form to your tax return. I can’t say that I’m familiar with many families that have gone through this procedure, but it does seem simple enough to allow it to be done.

What tax claims can a noncustodial parent make with a released child exemption?

If the custodial parent releases the exemption claim, you can claim your child as a dependent. This allows you to receive the qualifying child tax credit. Keep in mind that, however, you as the noncustodial parent may not claim the child to be head of household, the earned income credit, or the credit for child and dependent care expenses. Instead of delving further into tax issues, I would recommend speaking to an experienced tax professional about these subjects while going through a divorce. Additionally, consult your family law attorney for guidance based on your particular circumstances.

What about the taxes associated with selling your home and interest on mortgage payments?

A major area of financial concern for people that go through a divorce is their family home. Not only are people concerned with the idea of having to move out of their family residence and find a new place to live, transport their children back and forth between multiple residences and figure out how to sell a home if that is what is in everyone’s best interest, but there are tax considerations to make in these areas as well.

Although many couples do their best to fight to keep the house in one of their possessions after the divorce, it may be in your family’s interest to consider selling the house and splitting the equity in the home between you and your spouse. Considering capital gains taxes while working on a settlement with your spouse is essential. The tax cuts and JOBS Act did not change the laws involving capital gains as much as they did regarding the laws on deductions and credits associated with your children.

What are post-divorce home sale tax exemptions and home equity credit tax changes?

For instance, if you have lived in your house before the divorce for at least two years and decide to sell the home, then you can exempt up to $250,000 of the gain on the sale from the house. If you are married filing jointly, that number doubles to $500,000 so long as either you or your spouse owned the residence and both would be resided in the home for at least two out of the past five years. By the same token, even if you are awarded the house in the divorce and choose not to sell, you may do so and still be able to exclude 250,000’s worth of gain for capital gains purposes.

Do you own a home equity line of credit? This has become a much more popular method in recent years if you want to perform updates or improvements on the House or perform some action that you otherwise would not have been able to do but for this loan. In many cases, people treat your home access as the collateral for the loan and consider it a second mortgage. The tax cuts and JOBS Act no longer allow people to deduct the interest paid on home equity lines of credit. However, an exception exists for home equity lines of credit used specifically to improve that home.

What are post-divorce tax rules for mortgage interest and alimony?

The most important issue that I can conceive of about you and your spouse who is going through a divorce is if one of you is ordered to pay the mortgage on the home and can then take the interest deduction on your taxes for having paid that mortgage. Before the tax cuts and JOBS Act, individuals ordered to pay all the mortgage payments on their Community property home could deduct half of the interest paid as mortgage interest. They could then deduct the other half of the interest paid as contractual alimony or spousal support. As we touched on earlier, however, alimony is no longer allowed as a deduction. Therefore, the mortgage payments made on your Community property home lose much of their tax benefit as a result.

A word on college savings plans for your children

Are you in the process of trying to help your child save for college expenses? As college expenses increase every year, it becomes more and more important for you to plan to pay for your college education. The benefit of saving outside of a checking or savings account is that compound interest can work its magic to help you truly get some bang for your buck. This allows your dollars to work for you while you attend to other matters.

Contributions into a 529 college savings plan are not deductible. However, the earnings within a 529 plan grow tax-free and will not be taxed when the money is taken out to pay for your child’s college education. With the passage of the tax cuts and the job act, tuition for elementary, secondary, or religious high schools is all covered under this plan. Meaning that even if college is not in the plan for your child, a school that charges the funds can pay for tuition within this 529 plan.

Tax Implications of Asset Division

This article dives into the intriguing world of tax cuts and jobs act alimony. We’ve explored alimony, child support, and the family home in previous discussions. However, what about the tax implications of dividing other assets during a divorce? Retirement accounts, stocks, and business interests can be a complex terrain in the tax code when it comes to divorce. Let’s venture into this uncharted territory and shed some light on these aspects.

The Tax Cuts and Jobs Act brought about significant changes. One area that took a hit was the deduction of legal fees and professional expenses related to divorce. The elimination of this deduction could have far-reaching effects for individuals going through a divorce. This is particularly significant considering the potentially substantial costs associated with legal proceedings.

Tax Filing Status During and After Divorce

When going through a divorce, many wonder how it affects their tax filing status. Are they considered single, head of household, or married filing separately? Understanding the tax implications of these filing statuses can be crucial to avoid surprises come tax season.

The Impact of the Tax Cuts and Jobs Act on Personal and Dependent Exemptions

In the not-so-distant past, personal and dependent exemptions provided tax relief to many families. However, the Tax Cuts and Jobs Act waved its wand and eliminated these exemptions. This change could significantly alter the tax landscape for divorced couples, and it’s essential to comprehend its consequences.

Updates to Tax Laws since the Tax Cuts and Jobs Act

We find ourselves in the year 2023, six years after the Tax Cuts and Jobs Act shook the tax world. During that time, the tax code may have undergone numerous updates and amendments, particularly regarding divorcing couples. Staying informed about these changes is essential for those navigating through divorce proceedings.

Specific Tax Scenarios and Case Studies

Real-life examples and case studies can breathe life into the complexities of tax laws. Let’s explore specific instances of how tax laws impacted divorcing couples in Texas. By exploring these scenarios, we aim to offer insights into the challenges and opportunities encountered in the divorce process.

Pre-Divorce Tax Planning

For anyone contemplating divorce, the path forward can be daunting, both emotionally and financially. Offering pre-divorce financial and tax planning advice can be a beacon of hope amidst the uncertainties of the process.

Effects on Child Support

We previously discussed the child tax credit. However, the tax treatment of child support payments post-Tax Cuts and Jobs Act remains an enigma. Understanding these effects can be crucial for both paying and receiving parties.

Qualified Domestic Relations Orders (QDROs) and Their Tax Implications

When it comes to dividing retirement accounts, Qualified Domestic Relations Orders (QDROs) enter the scene. However, these court orders come with specific tax implications that deserve exploration. Let’s shed light on this aspect and empower our readers with the knowledge they need.

Tax Implications of Keeping vs. Selling the Family Home

The family home can often become a focal point of discussions during a divorce. Deciding whether to keep or sell the home can have lasting consequences, including tax implications. By exploring these potential advantages and disadvantages, we hope to provide clarity in this tumultuous decision-making process.

In conclusion, navigating the tax terrain during a divorce requires careful analysis and planning. The Tax Cuts and Jobs Act introduced significant changes that continue to impact divorcing couples. By delving into tax implications and real-life examples, we empower readers to navigate these complex waters confidently. Seeking professional advice is wise, especially during life-altering events like divorce, particularly regarding tax matters. Stay informed, stay empowered, and may your journey through the tax implications of divorce be a smoother one.

Keeping vs. Selling the Family Home

Aspect

Keeping the Family Home

Selling the Family Home

Capital Gains Tax

May incur capital gains tax if the home has appreciated in value since purchase. Depending on the circumstances, up to $250,000 (or $500,000 for married couples filing jointly) of the gain may be excluded from taxation.

Potential capital gains tax may apply if the home has appreciated in value since purchase. However, if you meet the ownership and use requirements, you may be eligible for the same exclusion as when you lived in the home.

Mortgage Interest Deduction

You may continue to benefit from mortgage interest deductions on your tax return if you keep the home. This can reduce your taxable income.

Selling the home means you’ll no longer be able to claim mortgage interest deductions, as you won’t have a mortgage on the property.

Property Tax Deduction

Keeping the home allows you to continue deducting property taxes on your tax return, providing some tax relief.

Once you sell the home, you won’t be able to claim property tax deductions for that property.

Costs of Maintenance and Repairs

As a homeowner, you’ll be responsible for ongoing maintenance and repairs, which can be a financial burden.

Selling the home relieves you of the financial responsibility for ongoing maintenance and repairs.

Emotional Attachment

Keeping the family home might provide emotional stability and familiarity during a tumultuous time.

Selling the home can provide a fresh start and closure to the past.

Financial Flexibility

Keeping the home might require a significant financial commitment and may impact your ability to invest in other assets.

Selling the home can provide a cash infusion that can be used to invest in other assets or start anew.

Housing Market Conditions

The decision to keep the home might be influenced by the current housing market conditions and the potential for future appreciation.

Selling the home might be more appealing if the housing market is favorable, allowing you to sell at a higher price.

Impact on Children

If there are children involved, keeping the family home might provide stability and minimize disruption to their lives.

Selling the family home might be emotionally challenging for children, but it could also be a chance for a fresh start in a new environment.

Conclusion:

Congratulations, brave souls! You’ve made it to the end of our wild tax and divorce adventure. As we bid farewell, let’s take a moment to reflect on this rollercoaster ride we’ve been on.

Remember when we talked about the Tax Cuts and Jobs Act zapping away the deduction for legal fees and professional expenses during a divorce? It’s like pulling a rabbit out of a hat, except not as magical for your bank account!

And oh, the twists and turns of figuring out your tax filing status during and after divorce! It’s like trying to choose the perfect emoji for your breakup text – complicated, but you’ve got to do it.

Let’s not forget the disappearing act of personal and dependent exemptions under the Tax Cuts and Jobs Act. Poof! Just like that, they vanished into thin air, leaving many of us scratching our heads.

But hey, it’s not all gloomy clouds and thunderstorms! We’ve shed light on the updates to tax laws since the Tax Cuts and Jobs Act, making sure you’re up to speed with the latest changes.

And how can we overlook the stars of our show – the real-life tax scenarios and case studies of brave Texans navigating divorce? From heartwarming success stories to cautionary tales, they’ve been the guiding beacons in this stormy sea.

Mastering the Maze: Navigating Taxes and Divorce with Ease

Now, if you’re contemplating a divorce, remember our golden nugget of advice – pre-divorce tax planning! It’s like putting on sunscreen before heading to the beach; you’ll thank yourself later.

And, of course, solving the thrilling mystery of QDROs and their tax implications is a puzzle waiting for us! It’s like cracking a secret code, only the reward is securing your retirement accounts.

Lastly, the nail-biting decision of keeping or selling the family home can send shivers down your spine! It’s like trying to pick the perfect movie for date night – a decision with lasting consequences.

Short Answer: So there you have it, fellow adventurers! Taxes and divorce can be a wild ride, but knowledge is power. Armed with our insights, anecdotes, and helpful tips, you can navigate the twists and turns with confidence.

As we say our farewells, remember that taxes and divorce may be complex, but they don’t have to be scary. Our mission was to make this journey a little less daunting, a bit more enjoyable, and filled with valuable takeaways.

Share your wisdom with loved ones and remember: you’ve got this when it comes to taxes and divorce! Until next time, keep smiling, keep laughing, and keep embracing life’s adventures. Farewell, brave souls, until our paths cross again!

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