When there are a lot of assets, such as in high net worth marriages, that need to be decided on in divorce, it’s important to remember the tax repercussions that can follow those decisions. You’ll want to make sure you have a complete understanding of how new laws will effect your tax filing.
2019 Law Changes
A number of tax law changes were implemented at the end of 2017 but a big disruption won’t happen until Jan. 1, 2019. The biggest direct impact is on alimony. Alimony will no longer be a tax deduction for the person paying it, and it will no longer have to be claimed as income by the person receiving it.
While the determination of the actual dollar value of alimony is relatively easy, the biggest sticking point is where the money for the settlement is coming from, and how well-prepared each side is for the long-term.
If you’re in the middle of your divorce, you can choose to file jointly with your spouse as long as you are still legally married at the end of the tax year, December 31. You qualify for this tax filing status even if you are physically separated so long as there is no final court judgment terminating your marital status. In order to file a joint return, both spouse must agree to do so.
If you’re in the middle of your divorce, have been physically separated for at least half the year, and have had at least one child in your care for over 50% of the time, you will likely also qualify to file your taxes as “head of household.” Filing head of household will likely result in a lower tax rate.
Once your divorce is finalized, you may still continue filing as head of household so long as you qualify to do so. Otherwise you will be filing your taxes as single.
Spouses receiving alimony used to be able to claim it as earned income. Under the new law, they are no longer able to claim it, and thus cannot contribute to accounts like IRAs and Roths. So if they have no other earned income, they have no way to grow their tax-advantaged retirement accounts.
This can be especially hard-hitting when the divorce settlement is not enough to get by on. Even harder hit, are those who are not old enough and thus do not yet qualify for Medicare and Social Security.
How Tax Filing Status Impacts Your Support During Divorce
One of the key factors in calculating temporary support during your divorce is your tax filing status. Your support will be significantly different if you’re filing jointly as opposed to head of household/separately. Additionally, although spousal support is taxable income to the payee and tax deductible to the payor, in cases where parties are filing jointly, the inclusion/deduction of spousal support is a moot point.
The Pros and Cons of Filing Jointly
As a general statement, your tax burden is usually lower when you file a joint tax return. Therefore, many couples choose to file jointly even in the middle of their divorce. Filing jointly oftentimes is also easier, as you won’t have to figure out how to divide the deductions such as mortgage interest, property taxes, and dependency exemptions. Before assuming that filing jointly is best for you, it’s always best to work with a tax advisor to help you make the smartest financial decision for you.
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