LUTZ BUSINESS INSIGHTS
Taxes and Divorce: What You Need to Know
JOE DONOVAN, TAX MANAGER
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.
ABOUT THE AUTHOR
JOE DONOVAN + TAX DIRECTOR
Joe Donovan is a Tax Director at Lutz with over six years of experience in taxation. He primarily focuses his time on tax compliance, research, and consulting assistance to privately held companies in a variety of industries including real estate development and construction.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA in Accounting, University of Notre Dame, Notre Dame, IN
- Masters in Science of Accountancy, University of Notre Dame, Notre Dame, IN
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