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The tax implications of divorce

The change in tax law that has gone into affect in 2018 will see a new change in relation to spousal maintenance payments and the ability of the payor to deduct those payments. Starting in 2019 if you are on the hook to pay your ex-spouse spousal maintenance you will not be able to deduct those payments. On the other hand, your ex-spouse will no longer have to declare those payments as supplemental income and therefore the payments will not be taxed. For those of you who are considering divorce or have already been through the process this is a significant change.

Let me illustrate this point a little further. Suppose that you have been ordered to pay your spouse an annual amount of $50,000 in spousal maintenance. Under the former tax law you could deduct this payment and save a nice chunk of money based on whatever rate you are taxed at based on your income.

From your spouse’s perspective, if he receives those payments he would be taxed at a lower rate most likely as their income would not be as substantial as yours. Between the two of you there would be a net savings as far as overall taxes to be paid.

Under the new tax law the burden of paying taxes would be allocated differently. From the government’s perspective, more money is now going to be payable to the IRS as a result of the change in law. Some have argued that divorced persons received a benefit in shifting the tax burden in this area that married persons cannot equal. The argument is that married persons have less of a reason to stay married when the tax system does not benefit them over divorced persons. Whatever the reasons for the change, the tax laws will shift in 2019 and you need to be ready.

What other consequences are upcoming regarding taxes in 2019?

As 2018 begins to wind down, I wanted to share with you some thoughts on the affect your divorce can have on your tax situation. Whether you are actually divorced or just separated from your spouse you should begin to think about spousal maintenance, child support, deductions for your child and how you file taxes- either as a single person or as married filing separate.

How will you file your taxes in 2019?

Your filing status is important because it is how the government calculates your deductions, your eligibility for certain tax credits and what other requirements should apply to you in regard to filing your taxes.

For the purpose of attempting to file as “married filing jointly”, the IRS says that you are considered to be married and can file a joint tax return with your spouse is you are still married as of December 31st in the year your taxes are being filed for. While the tax rates are lowest for this category of filers, doing so means that you are on the hook for any problems that are associated with your spouse and their income. Make sure that you understand the potential consequences of filing married filing jointly before doing so.

The innocent spouse principle applies if you are being held responsible for the bad acts of a spouse that you had no knowledge of and had no ability to counteract. You are allowed to submit a statement to the IRS that details your lack of involvement in any behavior of your spouse that led to problems associated with your tax return. While this is not something that you should bank on, as far as saving you from liability, there is at least the possibility that you may be in the clear as a result.

If you and your spouse were divorced by December 31st of the tax year you are filing a return on, you will need to file as a single person. You can qualify to file as Single/Head of Household if you were divorced by December 31st, have a child living with you for more than half of that year and were responsible for paying more than half of your household’s costs for that year.

On the other hand, if your divorce will drift into 2019, you must file as a married person- either separate or jointly with your spouse. A person who files as married/separate will face the highest tax rates amongst the different filing options. The only reason that I can think of to file separately from your spouse would be to avoid any confusion/issues/liability regarding an issue with your spouse’s income or portion of your tax return. If it is worth it to keep your return clean of residue from your spouse this may be the best option for you.

Deducting your children on your tax returns

You and your spouse can “trade off” listing your child on your individual tax returns by utilizing and submitting a form available through the IRS. Many people actually hold off on filing for divorce because they do not want to lose out on the ability to claim an exemption for your child.

From a dollars and cents perspective it makes logical sense to allow your spouse to claim your child if he or she earns more money than you do. A tax professional can tell you who stands to reap the greater rewards from being able to claim your child on your taxes. You and your spouse can agree between yourselves or can agree in your divorce decree to split the tax savings between yourselves. This should cause you to feel a little better about allowing your spouse the exemption.

Child Support and taxes

If you receive child support from your ex-spouse it does not count as earned income. Your ex-spouse cannot deduct child support payments from his or her taxes as well. As we touched on in the opening section to this blog post, spousal maintenance does count as income and is deductible in 2018 but as soon as the calendar switches over the 2019 it will no longer be the case. This is a fairly significant change in our tax law and may have a dramatic affect on property settlements in conjunction with divorces.

Property taxes and divorce

If you are awarded property outright or shares of a property in your divorce you will not be taxed on those awards of property. However, if a piece of property was sold during your divorce taxes will be due on those either at the capital gains rate or ordinary income depending on when the property was liquidated.

The same applies if you have a traditional IRA and have converted it into a Roth IRA. When your pre-tax savings become after-tax savings there will be a tax for you to pay at your ordinary income rate.

If you and your spouse utilized a Qualified Domestic Relations Order (QDRO) to move retirement money from one spouse to the other in your divorce then you should not be on the hook for any taxes as a result of that transaction.

Questions regarding divorce? Contact the Law Office of Bryan Fagan, PLLC

If you have questions regarding divorce in 2018 and beyond please do not hesitate to contact the Law Office of Bryan Fagan, PLLC. We offer free of charge consultations with our licensed family law attorneys. We can answer your questions on subjects across the spectrum of family law and we would be honored to do so. Our attorneys will always put your interests ahead of our own and we will seek to achieve the best possible outcome for you and your family.

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