Once you go through a divorce, there are so many things you’re going to have to deal with. These are usually the emotions of a broken relationship as well as the paperwork, the lawyers, the hearings, and the money. Dividing up assets is already a challenge, how much more if you have to face new tax changes taking effect in January 2019? The stress to divorces after this year is going to be so real.
Here are the 4 key tax changes to come soon regarding divorce that you might want to to keep an eye on:
If you’re paying alimony, the amount you paid will no longer be tax-deductible while if you’re the one receiving it, you will no longer include the amount as a taxable income. For a long time, taxpayers are able to deduct alimony in their tax return and is a taxable income for those receiving it. The provisions in the big 2017 tax law eliminated it starting next year and beyond.
The change could result in an even more emotional divorce process. Spouses earning high income will have to push on paying less in alimony their payments are no longer subsidized by the government via the tax deduction. The income of a lot of women is going to be badly affected after the divorce and eventually hurt their overall finances. Spouses earning lower-income, on the other hand, will likely fight to get as much alimony as possible since they no longer have to worry about taxes and the payments will go further.
The legal fees paid to lawyers who help secure alimony are no longer tax deductible beginning 2019 as well. If you want to want to stick to the traditional tax rules for alimony, you’ll have to sign an agreement before December 31, 2018.
If your agreements are modified in 2019 or beyond, the new rules may still be applied to you even if you’re already divorced and you are grandfathered in. The new rules will apply with the modification states that it is to be subjected under the new rules. On the other hand, the old rules will apply if the modification does not say anything. The bottom line is one must be careful when making modifications on their divorce agreements in 2019 and beyond.
It is best to have a financial consultant, an attorney or both to review the pre- and post-nuptial agreements as the new rules may nullify most of the items in these agreements. Do not ignore this important change and if necessary, re-negotiate your terms.
Since the 2017 tax law removed the $4,050 exemption for each dependent through 2025, children will no longer be the tax deduction they used to be. However, the child tax credit has doubled from $1,000 to $2,000.
Couples divorcing in 2019 must also keep in mind that the new tax law has almost doubled the standard deduction - single taxpayers will expect a higher standard deduction of $12,000 from the $6,350 in 2017.
Here are a few tips about divorce and taxes if you’re going through a divorce in the new year:
Evaluate your situation.It’s important for you, your spouse, both attorney and your trusted financial adviser to look at all the angles. You have to identify which ones will do good for you and which ones do not. Identifying the good assets and the bad assets when it comes to taxes is a must. Although we are talking about alimony, it is not the only asset involved in a divorce.
You may want to look into Individual Retirement Accounts (IRA) if you’re the high-income earner spouse and give it to the spouse who earns a lower income if applicable. This will help transfer the tax burden to the receiver when that IRA is accessed. Remember that you will have to deal with the burden if you’re the lower-income spouse.
The total tax equations of both parties must be carefully considered and the best overall comprehensive way to benefit their finances - both short-and long-term - must be chosen.
Take it slow. You cannot afford to become the very first person to file for divorce under the new economics of divorce next year. So make sure your attorneys and financial adviser explore the new world, discover the ins and outs, learn new angles and tricks and be completely ready to put you in a position of financial success in your divorce.
Consider taking (or giving) your lumps.If you’re planning to invest, pay for home repairs, or simply to be able to move on quickly, you might want to consider taking or giving a lump sum divorce payment rather than monthly payouts.
Seriously thinking about your financial situation and it’s uniqueness compared to others. See if receiving one large payment annually allows you to responsibly strengthen your fiscal situation.
CONTINENTAL TAX AND ACCOUNTING SERVICES