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Taxes and Divorce: What You Need to Know

Joe Donovan, Tax Shareholder
August 23, 2018
Taxes and Divorce: What You Need to Know
If you're in the midst of a divorce, you know how challenging it can be when it comes to separating finances and assets. But when you add taxes into the mix, it can make the situation even more challenging. That's because tax laws are complex and have the ability to change over time. With the recent tax reform under the Tax Cuts and Jobs Act or TCJA, those who are considering divorce may need to evaluate how this change to the tax law can impact their finances and tax obligations. Here is what you need to know about divorce and taxes:  

1. No More Alimony Deductions For Some

With to the TCJA, the timing of your divorce can greatly impact your tax deductions. Prior to this new tax act, taxpayers who made qualified alimony payments were able to deduct these payments from their federal income taxes. Also, alimony recipients were obligated to report these payments as taxable income. Going forward for divorce agreements signed after December 31st, 2018 taxpayers will no longer be able to deduct alimony payments. This also means that alimony recipients won't have to include these payments as taxable income. But those who pay under agreements made before 2019 may continue to claim alimony deductions.  

2. The Dependent Exemption is Zeroed Out

Under the new tax law, there are no more deductions for dependent or personal dependents. This would have amounted to $4,150 per exemption for 2018 had the law not changed. The new tax law eliminates these exemptions. That means any reference in regards to dependent exemptions for those who would've been allowed to take them in previous years, including non-custodial parents who may have received tax breaks after a divorce, is zeroed out. While the courts may impact who can claim the deduction when they name the custodial parent in the court documents, the tax law has the final say. It all depends on how the content is worded in the documents. For example, parents who are identified as the custodial parent in a court document have the right to claim the child for tax purposes. When it comes to joint custody cases, divorced parents may choose to have a written agreement that identifies the terms of tax claims or alternate tax claiming years. However, only one parent can claim the child per tax year.  

3. When Your Filing Status Changes, So Does Your Tax Rate

Changing your tax filing status will impact how much taxes you owe. The marginal tax rate a taxpayer pays is determined based on their filing status and their taxable income. Generally speaking, a taxpayer filing their return with single or head of household status will have a higher marginal rate than a married couple filing a joint return with the same taxable income. For example, the tax rate for unmarried individuals who file as a single taxpayer with taxable income up to $38,700 in 2018 is 12 percent. Those who file head of households get taxed that same rate but the taxable income threshold is higher (up to $51,800). Married individuals filing a joint return pay that same rate up to $77,400. But if you were to have that same taxable income of $77,400 and file under a single status, your marginal tax rate would be 22 percent. Thus, it's key to consider your new filing status and how it will affect your tax obligations.   In summary, when you're going through a divorce, it's important to understand how it can affect your taxes during that year. By taking the time to consider these changes, you can keep surprises at bay and plan your taxes effectively.
  • Achiever, Individualization, Strategic, Focus, Learner

Joe Donovan

Tax Shareholder

Joe Donovan, Tax Shareholder, began his career in 2012. Over the past decade, he has built comprehensive expertise in taxation while taking on significant leadership roles. Joe serves on both the board of directors and the Lutz Financial board and contributes to the firm's strategic direction through the tax policy committee. 

Leveraging his knowledge in business and income tax planning, Joe focuses on serving clients in the private equity, construction, real estate, and family office sectors. As a Chartered Advisor in Philanthropy, he provides comprehensive tax and estate planning solutions that align with clients' broader financial goals. Joe thrives on partnering with his clients to boost their business profitability, aiming to be their most trusted advisor not just for tax planning but for general business decisions as well. 

 

At Lutz, Joe exemplifies the firm's commitment to being an expert through his strategic approach to complex tax matters. His dedication to continuous learning and ability to understand each client's unique situation enables him to develop tailored solutions that drive success. As a leader in the firm, he actively contributes to fostering growth and developing the next generation of tax professionals. 

 

Joe lives in Omaha, NE, with his wife Franci and their children Jack, Katie, and Danny. Outside the office, he can be found spending time with family, traveling, and reading. 

402.827.2047

jdonovan@lutz.us

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