Navigating a divorce can be emotionally and legally complex. One crucial aspect often overlooked in divorce financial planning is understanding the tax implications. Recent changes in tax laws, especially those affecting spousal maintenance, came into effect in 2018. These changes significantly impacted the way spousal maintenance is treated for tax purposes.
In this comprehensive guide, we actively examine how divorce can directly affect your tax status, deductions, and liabilities. Moreover, we delve into various aspects, including changes in how spousal maintenance gets taxed, considerations regarding filing status, and tax deductions related to children. Our primary objective is to furnish you with a clear comprehension of the tax implications of divorce, thereby enabling you to proactively navigate these alterations with confidence.
Changes in Tax Laws Affecting Spousal Maintenance
The 2018 tax law revisions have indeed ushered in noteworthy alterations in how spousal maintenance payments undergo treatment. Commencing in 2019, the payor loses the ability to deduct spousal maintenance payments from their taxable income. Conversely, the recipient is no longer obligated to report these payments as taxable income. This shift marks a substantial departure from the previous norm, significantly impacting the financial landscape of post-divorce obligations.
The previous tax laws allowed the payor of spousal maintenance to deduct these payments from their taxable income. This was often a significant financial relief, especially for high earners. Conversely, the recipient, usually earning less, would be taxed at a lower rate on these payments, resulting in overall tax savings for both parties. The new law, however, shifts the tax burden and potentially affects the financial strategies of both parties in a divorce.
Upcoming Tax Consequences in 2019
As 2018 winds down, it’s crucial to consider the tax implications of divorce. This includes considerations around spousal maintenance, child support, child-related tax deductions, and your tax filing status. Each of these factors can significantly influence your tax liabilities and returns.
Filing taxes in 2019 particularly impacts your marital status. Your filing status determines your tax deductions, eligibility for tax credits, and other filing requirements. The IRS considers you married for tax purposes if you remain legally married as of December 31st of the tax year. However, filing jointly means you’re responsible for any issues with your spouse’s income, which could have significant implications.
Filing Status Considerations for Divorced Individuals
If divorced by December 31st, you must file as a single person. Qualifying as Single/Head of Household depends on whether you divorced by this date, if your child lived with you for over half the year, and if you were responsible for the majority of your household expenses. Conversely, if your divorce extends into 2019, you must file as married, either jointly or separately. Filing as married/separate often results in higher tax rates, but it can be a strategic choice to avoid complications from your spouse’s financial issues.
The “innocent spouse” principle offers protection if you are unwittingly held responsible for your spouse’s misdeeds. This principle allows you to submit a statement to the IRS clarifying your lack of involvement in any problematic behavior of your spouse that led to tax return issues.
Child-Related Tax Deductions and Exemptions
Determining who claims the children on tax returns can significantly impact your financial situation post-divorce. The IRS permits parents to alternate claiming children on their returns. Often, the higher-earning spouse may benefit more from claiming the child, but this should be evaluated by a tax professional. You can agree in your divorce decree or independently to split the tax savings from claiming your children.
Child support payments received are not considered earned income and thus are not taxable. Similarly, the payer cannot deduct child support payments. This is in contrast to spousal maintenance, which, until 2019, was tax-deductible for the payer and taxable income for the recipient.
Property Taxes and Divorce Settlements
Receiving property or shares in a property as part of a divorce settlement does not incur taxes. However, if property is sold during the divorce, taxes on capital gains or ordinary income are due, depending on when the sale occurred. Converting a traditional IRA into a Roth IRA triggers taxes on pre-tax savings at your ordinary income rate. The use of a Qualified Domestic Relations Order (QDRO) to transfer retirement funds between spouses typically does not incur tax liabilities.
In conclusion, divorce financial planning is essential for ensuring a stable financial future, particularly when considering the tax implications of divorce. The changes to tax laws, especially those affecting spousal maintenance, make it even more important to understand how divorce can impact your taxes. By addressing these considerations early on, you can make informed decisions that help protect your financial interests and avoid unexpected tax burdens. Consulting with a financial advisor or tax professional can further assist in navigating the complexities of divorce-related tax issues.
Seeking Legal and Tax Advice for Divorce
For comprehensive guidance on divorce and its tax implications, contacting the Law Office of Bryan Fagan, PLLC is advisable. Our team of experienced family law attorneys can offer free consultations, providing insights into the complex intersection of family law and tax regulations. We prioritize your interests and strive to achieve optimal outcomes for you and your family.
The Law Office of Bryan Fagan, PLLC is dedicated to providing clients with personalized legal services. We thank you for your interest in our law practice and invite you to join us for more insightful content on Texas family law. Our commitment is to guide you through the legal intricacies of divorce, ensuring you are well informed and supported throughout the process.
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The Law Office of Bryan Fagan, PLLC, routinely handles matters that affect children and families. If you have questions regarding CPS, it’s essential to speak with one of our Houston, TX CPS defense Lawyers right away to protect your rights.
Our CPS defense lawyers in Houston, TX, are skilled at listening to your goals during this trying process and developing a strategy to meet those goals. Contact the Law Office of Bryan Fagan, PLLC by calling (713) 903-3167 or submit your contact information in our online form.
