February 23

Divorce and Taxes: Will the New Tax Law Changes Cost You More?


child support, dividing property in divorce, divorce advice, divorce blog, divorce financial planning, divorce strategy, negotiation

Two things most sane people seek to avoid are divorce and taxes. Unfortunately, when you’re going through a divorce, not paying attention to taxes can cost you thousands. That’s especially true with the new tax law changes going into effect this year and next. Now more than ever, not understanding how taxes will affect your divorce can be a very expensive mistake.

Wedding rings on tax return signifying divorce and taxes.The Basics of Divorce And Taxes

The first thing you’ve got to remember about filing taxes after divorce is that your tax status is going to change. Married filing jointly is the most tax-favored way to file taxes. Once you’re divorced, you will lose that status.

Lots of people think that as long as they were married for some part of the year, they can still file taxes as married filing jointly. That’s not true.

Your marital status for income tax purposes is determined as of December 31. If you were married on December 31 you will file your taxes for that year as married. If you were divorced, your only option is to file either as a single person, or head of household.

To secure the most favorable tax treatment, people often wait until January 1 to get divorced. That allows them to file income taxes as a married couple in the previous year. But, with some of the new tax law changes, waiting to get divorced this year can cost you a bundle.

Paying Taxes on Alimony and Child Support

Historically, alimony (also known as maintenance or spousal support) was tax-deductible to the person who paid it. The person who received alimony paid the tax on the income.

This was known as the alimony tax deduction, and it often made settling divorce cases easier.

No one is happy about having to support their ex after divorce.  But, if you got a tax deduction for doing so, it made forking over alimony a little less distasteful. What’s more, it reduced the combined income taxes you and your spouse paid.

Here’s how.

Since the person who received alimony made less money, they were usually in a lower income tax bracket.  That means that they paid less in taxes on the money they received than their spouse would have paid if they had to claim that income.

By shifting income to the lesser earning spouses, couples were able to pay less taxes overall. Theoretically, that left more money available to support the kids.

Now, though, all of that has changed.

Beginning January 1, 2019, alimony, like child support, will no longer be tax-deductible to the person who pays it. That means that if you want to be able to take advantage of the alimony tax deduction, you have to get divorced in 2018. Period.

(To learn more about how the changes to the alimony tax deduction will work, CLICK HERE.)

IRS auditor with stack of documents.8 Ways the New Tax Law Could Impact Your Divorce

 1. Tax Rates Got Lowered and The Standard Deduction Got Higher.

 The new tax law lowered the tax rate for most taxpayers. That’s generally good news. It also “doubled” the standard deduction that every taxpayer who didn’t itemize deductions used to get.

While that may make you think your income taxes will drop in 2018, like everything Congress does, there’s more to the story.

While Congress doubled the standard deduction from $6,500 for a single taxpayer to $12,000, it also eliminated the personal exemption. That personal exemption would have been worth $4,150. So the amount of the deduction and exemption you would have gotten under the old law was $10,650.  The amount you will get under the new law is $12,000.

That’s definitely better. But it’s not double.

How This Could Affect Your Divorce

How will the lower rate and higher standard deduction affect you in your divorce? The answer is: it depends. The change in the standard deduction alone probably won’t dramatically change the amount of income taxes you pay. But that, coupled with the lower tax rate, could make a big difference in how much you pay in taxes every year.

… or not.

Congress also eliminated a lot of tax deductions that you used to be able to claim. So, what you gain from one tax law change, you lose in another.

2. Personal Exemptions

 In the past, when you filed your taxes, you got to claim yourself, and each of your kids, as dependents on your taxes. Known as “personal exemptions” or “dependency exemptions,” these tax breaks allowed you to subtract a certain amount of money from your taxable income for every dependent you claimed. The more dependents you claimed, the more money you could subtract.

The dependency exemption, however, was not set in stone for everyone. If you made over a certain amount of money, you couldn’t claim the dependency exemption.

How This Could Affect Your Divorce

When couples divorced, they often argued over which of them got to claim the kids as dependents on their income tax returns after divorce. Kids can typically be listed as dependents on their parents’ income tax returns until they turn 18, or graduate from college (with some exceptions). However, each child could only be claimed as a dependent by one parent.

The new tax law has eliminated all of these personal exemptions. Beginning in 2018, and continuing through 2025, no one will get a tax exemption for claiming the kids as dependents.

At first blush, that might seem like good news for divorcing couples. If no one gets to claim the kids as dependents, that’s one less thing to fight about, right?

Not exactly.

Although neither parent will get a tax exemption for claiming the kids as dependents through 2025, theoretically, the dependency exemption could come back to life in 2026. So, if your children are under 10 years old, you might still be able to benefit from claiming this exemption in the distant future.

Even if your kids are older, the same thing could be true if they are still in college after 2025.

Finally, while the dependency exemption itself may not be worth anything for years, deciding which parent can claim which child as a dependent may affect the child tax credit.

For all of these reasons, you still need to decide which parent is entitled to claim which child as a dependent in any given year.

child tax credit table3. Child Tax Credit

Another tax benefit available to parents is the child tax credit.  Before 2018, that tax credit lowered the amount of taxes that parents paid by $1,000.00 per “qualifying child.”

There were 7 requirements for determining who was a “qualifying child”.

The child …

  1. … must be under age 17;
  2. … has to be your biological child, a stepchild, an adopted child, or a foster child;
  3. … cannot provide more than half his/her own support during the tax year;
  4. The parent seeking the credit had to claim the child as a dependent;
  5. … has to be a U.S. citizen, a U.S. national or a U.S. resident alien;
  6. … must have lived with the parent claiming him/her for more than half the year;
  7. The parent can’t make more than a certain amount of money. If s/he does, then the child tax credit will be reduced or eliminated.

In the new tax law, Congress increased the amount of the child tax credit to $2,000. They also dramatically increased the amount of money that parents could make before the child tax credit gets phased out. That’s the good news.

However, Congress did NOT change the rules for figuring out who is a “qualifying child.” That’s the confusing news.

How This Could Affect Your Divorce

Even though the dependency exemption has no value (at least through 2025) a child only “qualifies” for the child tax credit for the parent who can claim him/her as a dependent. That’s why, in your divorce, you still need to negotiate which parent can claim each child as a dependent.

If you don’t say who can claim the child as a dependent, you risk losing the child tax credit. That can be a big deal. Why?

The child tax credit directly reduces the amount of income tax you pay. So, it doesn’t just reduce your taxable income. It reduces your taxes. And, let’s face it. Who wouldn’t want to pay $2,000 less in taxes per year?

Green Dollar Sign4. Education Expenses (529 Plans)

 Another new tax law change is the change to 529 Plans.

529 Plans are special tax-advantaged savings accounts that parents (or grandparents) could create to save money for children’s college educational expenses.

In the past, 529 Plans could only be used to fund “Qualified Higher Education Costs.” That’s IRS speak for college tuition and certain other college expenses. If you used the money in a 529 Plan to pay for anything else, you had to pay a penalty on the money you used.

Under the new tax laws, parents can take up to $10,000 per year out of a child’s 529 Plan and use it to pay for that child’s elementary or secondary school tuition.

How This Could Affect Your Divorce

Like most parents, if you have 529 Plans set up for your kids, you assumed that the money that you were setting aside would go to pay for your kids’ college. Because there were penalties for using the money for any other purpose, in the past, most parents left their kids’ 529 Plans alone in divorce.

Now, if your kids are going to private school, you or your spouse could want to use the kids’ college money to pay for it. That will save you from having to pay the private school tuition yourselves.

It will also leave your kids with less money (or no money) to pay for college.

The bottom line is that deciding what to do with your kids’ 529 Plans is now one more thing you’ve got to negotiate in your divorce.

Stacked moving boxes. Moving expences in divorce.5. Moving Expenses

 It goes without saying that, when a couple divorces, at least one of them moves out. Many times, the person who moved out also got a new job.

Before this year, if you were moving because of a new job, you could deduct your moving expenses from your taxable income. Now, you can’t.

How This Could Affect Your Divorce

While paying for moving expenses may not be a huge issue in your divorce, the truth is: moving costs money. Since there is probably no way you will ever get to deduct those moving expenses from your taxes, you might want to think harder now about how you will pay for those expenses when you divorce.  If possible, you may also want to negotiate who will pay for those expenses as well.

6. Mortgage Interest & HELOC payments

Under the current tax law, you can deduct the interest you pay on your home mortgage on your taxes. In the past, that deduction was limited to the interest you paid on the first $1,000,000 of your loan. But, you could deduct that interest if it was on any kind of a mortgage or home equity loan. It didn’t matter if you actually used the money to pay for your home or pay off your credit cards.

That’s all changed now.

From now on, the new tax law limits the mortgage interest deduction to interest paid on the first $750,000 of your loan. To be deductible, the loan must also be used to buy, build, or substantially improve the home that secures the loan. That applies to home equity loans and lines of credit, too.

How This Could Affect Your Divorce

By making mortgage interest non-deductible unless you use the money for your home, the IRS has now closed a potential means of cash flow that often made settling your divorce easier.

Here’s why.

In the past, if a divorcing couple had a home equity line of credit that wasn’t maxed out, they could draw on that loan in their divorce. They could then use that cash to pay for their divorce expenses. Or, they could use it to balance out their property settlement or pay moving expenses.

When they withdrew that money, they could deduct the interest they paid on it from their taxes.

Now, you can still draw on your home equity line of credit in your divorce. But, if you use the money to pay for anything besides home improvements, any interest you have to pay will not be tax-deductible.

Letters "IRS" carved from money on a black background.7. State and Local Tax Payments

 Real estate taxes can be hefty. Before 2018, you could deduct the amount you paid in real estate taxes on your federal income taxes. You could also deduct what you paid in state income tax, sales tax and other state and local taxes.

Not anymore.

From 2018 on, you can only deduct the first $10,000 you pay in state and local taxes, including income taxes, real estate taxes and sales taxes.

How This Could Affect Your Divorce

If you’re thinking of keeping your home when you divorce, you’ve got to figure out if you can afford it. Hopefully, you figure that out first!

Not being able to deduct the full amount of the property taxes you pay can potentially cost you more in income taxes. That increases your expenses and reduces your cash flow. While it might not seem like a lot, money is tight after a divorce.

Those extra expenses can also tip the balance in your finances. and make keeping your home unrealistic.

Remember, too, that you can only deduct your property taxes if you itemize your deductions. Beginning in 2018, so many deductions will be gone that many people won’t be able to itemize their deductions anymore. If that happens, you won’t be able to deduct any property taxes you pay from your income.

The bottom line is that, before you negotiate to keep your house in your divorce, you would be wise to consult with a divorce financial planner or accountant to make sure that you can actually afford to do that.

8. Medical Expenses

 Most of the new tax law changes we’ve discussed affect divorce fairly negatively. The changes to the medical expense deduction, however, are positive (at least for now).

Before the new tax law changes, you could only deduct medical expenses that exceeded 10% of your adjusted gross income. Now, however, you can deduct medical expenses that exceed 7.5% of your income.

That means there’s a bigger chance that you’ll be able to deduct medical expenses on your taxes. What’s even better is that Congress made this change retroactive to 2017. So, you can take advantage of this tax deduction immediately.

What’s not better is that, from 2019 on, the deduction threshold goes back up to 10%. So, essentially, Congress just gave us a two-year reprieve on the medical expense deduction.

Of course, in order to be to deduct medical expenses at all, you have to be able to itemize your deductions.   Since fewer people will be able to itemize their deductions in 2018, fewer people will be eligible to use this deduction at all.

How This Could Affect Your Divorce

If you have a lot of medical expenses, and you are getting divorced, the lower-income threshold for deducting medical expenses can be good news. First, when you divorce you can no longer file taxes with your spouse. So, you will have less income to declare on your taxes. Since you can deduct expenses that exceed 7.5% of your income, that means you will likely get more deductions.

All of this could ease the cash flow crunch that divorce usually causes.

The bad news, of course, is that this is just a temporary fix. It goes away after 2019. Even still, it will be nice while it lasts.

1040 form with a red stamp "Due," as a result of the new tax law changes in divorce.The Bottom Line When it Comes to Divorce and Taxes

Divorce and taxes are complicated.  The new tax law changes are complicated. What’s more, no one knows exactly how they are all going to play out long term.

Because of all that, it’s vitally important that you consult with a tax expert BEFORE you finalize your divorce. If you wait until your divorce is over, you may end up in a bad situation that you can’t change.

Even if you are just thinking about divorce, you should talk to an accountant or divorce financial planner. They can point out problems in your finances that you might not otherwise see.

A settlement that looks great on paper, may leave you with way less money after taxes than you thought. A support obligation that you thought you could afford, may leave you seriously cash strapped after you pay all your taxes.

The bottom line is that understanding divorce and taxes is one of the most important things you can do to secure your financial future.

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  • Thank you for taking time to write and provide this information. I am recently divorced after 25 years from an attorney. After financially putting him through law school, and 3 grown beautiful daughters. I lost everything and found out everything was in my name including my kids college loans. The only thing together was the house and truck were both of our names. I was totally stupid. He refused to sell the house and refused to file bankruptcy. I was a good attorney’s wife (and said nothing to anyone for over 2 years) and I could seriously write a book. Lastly I recommend those to read “Too Good to Leave Too bad to Stay” by Mira Kirshenbaum. I don’t regret leaving but so wish I did it 6 years ago. I am 46 and starting all over. Trying to keep my head up when I go to church and the funny thing not one person ever contacted me from the church until it was over. God never gives what you can’t handle. Right? It’s been tough! My girls say mom you stay strong! Divorce is just not fun! Thank you Karen!

  • This is an outrageous story of laws that do not acknowledge marriage as a financial partnership. Even more peculiar is that some states, like my own New Jersey, has taken the extreme opposite track of Indiana”s. In NJ, alimony for a marriage like Lori Vanatsky, would have been permanent, for life, no incentive for the supported spouse to move on with their lives. It seems to me that there should be a balanced middle ground, which I very much hope that Indiana will pursue. Somewhere between NO alimony and PERMANENY alimony lies an equitable position that strikes the balance of a fair amount of support until a spouse can get on their feet, but still provides an incentive to get on with life. Kudos to Lori Vanatsky. She proves that moving on is possible. Lori is a role model.

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