Dividing up assets is difficult in a divorce and the new tax law changes that went into effect in January 2019 are not going to make it any easier, according to Next Avenue in “How the Tax Laws for Divorce Will Turn Upside Down in 2019.”
Here are the four key changes:
Alimony paid will no longer be tax-deductible, and alimony received will no longer be treated as taxable income. For decades, alimony has been tax deductible for the person paying it and taxable as income for the person receiving it. Expectations are that the federal government will benefit by as much as $6.9 billion over the next 10 years. Other expectations are that high-income divorcing spouses will fight more aggressively to pay less in alimony, since it is no longer a deduction. Smaller alimony payments may be a result. In addition, legal fees paid to secure alimony will no longer be deductible.
If your divorce is modified in 2019, you might be subject to this new rule. If you are already divorced, you’ll be governed by the old rules. However, be careful of any divorce modifications in 2019.
Pre- and post-nuptials may change also. Certain agreements may be nullified under the new law.
Children won’t be a tax deduction. The 2017 tax law eliminated the $4,050 exemption for each dependent until 2025. On the other hand, the child tax credit has doubled from $1,000 to $2,000.
For those who are facing divorce in the year to come, be aware that your attorney, your spouse and you need to work together if possible to minimize the tax liabilities that may be created in the divorce.
If you are the spouse with the higher income, consider trading an IRA account to your lower earning spouse because that shifts the tax burden to the IRA owner when they start taking distributions. If you are the lower-earning spouse understand that, unless it’s a Roth IRA, you will have to pay taxes on distributions.
If possible, delay the divorce until others have navigated the new rules. It takes time for attorneys and financial advisors to get up to speed when there are significant changes in the law. By mid-year or later, the professionals who guide you along this journey may have strategies they did not have in the early part of the year.
An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and takes into account the implications of recent tax changes.
Reference: Next Avenue (Dec. 4, 2018) “How the Tax Laws for Divorce Will Turn Upside Down in 2019”