5 New Divorce Tax Rules That Could Leave You With A Huge Financial Disadvantage
No one is under the impression that going through a divorce is pleasant. Outside of the emotional challenges of such an uncoupling, there are also sticky legal and financial situations to work through. Untangling your assets from your spouse can be both complicated and painful and if dividing up your assets wasn't hard enough, there are new tax changes in effect that could make the process even more difficult.
Rules and laws that have been in place for decades have recently just been given a major switch-up thanks to the US government. If you've recently gone through or are currently going through a divorce, it's essential that you're up to date on divorce tax laws. Read on and we'll walk you through everything you need to know below.
1. Alimony Is No Longer Tax Deductible
The biggest and most talked-about change in divorce law this year has to do with the matter of alimony. The previous tax alimony rules have been in place for nearly 70 years, but as of this January, they're old news. Prior to this January, alimony payments were considered a tax-deductible expense for those paying up (usually men). On the flip side, those receiving alimony payments were taxed on this money as if it were any other source of income. That's how it's been for decades.
As of the first day of the year, this is no longer the situation. Individuals receiving alimony will no longer have to pay taxes on their received amount. Those paying alimony will no longer be able to write it off. This is all due to the 2017 tax law rewrites, which reconfigured many different tax policies around the country.
As a result of this change, it's expected that high-income spouses will fight to pay less alimony since the government will no longer help cover these payments via deduction. While those that receive alimony will no longer be taxed on the money, they may be seeing a whole lot less come their way in general.
This could significantly impact women, who on average see their incomes fall steeply following a divorce. It could turn divorce proceedings even uglier, as the fight over alimony payments is now much more high-stakes. This is a huge, huge change in the realm of divorce law, and the government is set to benefit.
It's estimated that the IRS will collect $6.9 billion over this decade as a result of this change in the law.
2. Grandfathering Policy
How does the above affect those that are already divorced and paying alimony? Do the new changes affect them? The answer isn't quite black and white. New tax laws state that those who are already divorced will still be able to submit alimony as a tax-deductible expense. This allows them to proceed with little change to their situation.
That is unless they make any moves to modify their current arrangement. Any renegotiation on divorce proceedings can open up a couple to the new legal changes. It's not guaranteed that modification will force the new legal precedent on a couple, but the changes are very high. As such, it's essential that former spouses take extra caution in modifying their divorce agreements from here on out.
3. Changes In Child Tax Deductions
Prior to the new tax laws, a parent could count each dependent they had as a deduction on their tax return. This deduction could be as high as $4,050 per each dependent. As of January 1st, this deduction has been totally eliminated. The current law will prevent such a deduction from being reinstated until at least 2025.
That being said, there have also been changes to the child tax credit. This credit offsets taxes owed as opposed to functioning as a deduction. The tax credit used to be $1,000. But under the new law, it has now doubled to $2,000.
4. PreNup And PostNup Agreements In Flux
Policies are still being worked out in regards to how the law will treat pre-existing prenup and postnup agreements. It's possible that the new tax laws will nullify or modify different aspects of an agreement. For example, spousal support set at a certain number might now change under the new policy of non-deduction.
Couples moving through divorce proceedings will need to revisit their agreement with the help of a CPA or tax divorce attorney.
Legal agreements have all been thrown out of whack thanks to the tax bill, and it's essential that couples ensure their agreements hold up under new law.
5. Attorney Services No Longer Deductible
Alimony payments aren't the only divorce cost that is no longer tax-deductible. It used to be that the costs associated with hiring a divorce attorney could later be written off as a tax deduction. Under the new tax law, this is no longer the case. That means the sometimes quite costly fees of a divorce lawyer will be fully on a couple to pay for.
Legal fees used to help secure alimony will no longer be deductible. You or your spouse might need to devise a new legal strategy if such changes throw your budget off.
How New Divorce Tax Laws Can Affect You
Divorce proceedings are never pleasant and the new laws don't stand to make things any easier for American couples. The above information can help you determine how the new divorce tax laws might affect your personal financial situation. Let's get you started creating paystubs with our online paystub creator for proof of income.
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