The sad reality is more than 50% of marriages end in divorce. The median duration of a marriage in the United States is 11 years. Divorce is a reality and there are some important things you need to know from a financial and tax perspective.Recent changes to the U.S. tax law mean that divorced taxpayers will be paying in an additional $6.9 billion to the IRS in taxes. If you’re divorced or thinking of becoming divorced, there are a few things you need to know:
- Alimony will no longer be tax-deductible and alimony received will no longer be taxable – One of the big changes in the Tax Cuts and Jobs Act (TCJA) is for divorces issued after December 31, 2018, alimony paid to a former spouse will no longer be tax deductible. For those receiving alimony, these payments will no longer need to be reported as taxable income. These changes may make divorce between high net worth couples even more contentious and difficult than they have been historically.
- Attorney fees are no longer tax-deductible in 2019 and beyond – In the past attorney fees spent in securing alimony were tax deductible as a Miscellaneous itemized deduction. Under the TCJA the category of miscellaneous itemized deductions was eliminated. That means the longer, more drawn out court cases to determine alimony may be more costly.
- People divorced before December 31, 2018 are grandfathered – If your divorce was finalized and alimony established prior to January 1, 2019, your alimony payments will remain tax deductible. But be aware, if your alimony is modified after the first of the year and the modification stipulates that your agreement will be governed by the new rules, you will no longer be grandfathered under the old law.
- Your pre and post-nuptial agreements may be affected by the tax changes – The new tax law may alter the viability of your pre or post-nuptial agreements, so if you are under one, you should have your agreement reviewed by a financial consultant and/or attorney . For example, for divorcees in the top tax bracket, the cost of your pre-nuptial agreement may effectively double your alimony/maintenance costs in post-tax dollars.
- Your children are no longer tax deductible - The TCJA eliminates the $4,050 personal exemption for taxpayers and their dependents, now through 2025. AS a compromise under TCJA, the child tax credit (which offsets taxes owed, dollar for dollar) has doubled from $1,000 to $2,000 per child.
- It’s important than ever to get professional help and guidance – Because the TCJA has so many facets and so much potential downside for those undergoing a divorce, it’s more important now than ever to make sure you get sound professional tax guidance in consideration of the impact of divorce. While most seek out legal counsel in divorce proceeding, many attorneys may not include crucial language in the divorce decree needed to maximize tax benefits..
Divorce can be a very emotional, painful and expensive experience. That’s why it pays to make sure that you put yourself in the best possible position for the long-term. If you have any questions about how the new tax law might impact you, please contact your Zinner tax expert.