Atlanta Financial Blog

How Tax Law Changes Impact Divorce Outcomes

How Tax Law Changes Impact Divorce Outcomes

Cathy C. Miller, MBA, CFP®, CRPS®, CDFA™
October 22, 2019

Breaking up is hard to do. Divorce? Even harder. But the Tax Cuts and Jobs Act of 2017 (TCJA) introduced some changes to the tax code that may make things more challenging than ever.

Alimony

If your divorce was finalized after December 31, 2018 and includes alimony, it is no longer tax-deductible for the payor. But it is also no longer considered taxable income for the recipient.

Sounds like a great deal if you’re getting alimony, doesn’t it? But it may actually make settling a divorce more complicated. Without the tax break, the higher-earning spouse may be less cooperative in negotiating the amount of alimony they’ll pay.

Download our free report: Top 3 Financial Questions Before You Divorce

If you’re a woman, this change can be especially inconvenient (and costly). According to the U.S. Census Bureau, 75% of husbands out-earn their wives. So there’s a good chance your soon-to-be ex-husband will be paying you alimony. If he fights to minimize his obligation because he’s no longer getting a tax break for it (which many divorce attorneys believe will happen), then you may suffer, too. A longer divorce process means you’ll have to shell out more money for attorneys and court costs —not to mention the emotional toll of a drawn-out divorce. No one wins!

Filing Status and Tax Credits

Naturally, your tax filing status will also change after your divorce. You may choose to file as single or as head of household. Filing as the latter is beneficial, since you’ll get a higher standard deduction amount and possibly qualify for some tax credits you otherwise wouldn’t get.

But you can’t file as head of household unless:

  1. You’re unmarried as of December 31 for the tax year in which you file.
  2. You paid at least 50% of the cost of running your home during the tax year in which you file.
  3. You have tax dependents that have lived with you for more than half the year. Typically, these are your children. But in some cases, your parents may qualify as dependents if you financially support them (even if they don’t live with you).

If you have kids and are the custodial parent, you may claim the child tax credit ($2,000 per child) and the credit for other dependents (kids over age 17, or other qualifying dependents including older adults), which can translate into up to $500 per dependent. As the custodial parent, filing as head of household can make a big difference in your tax situation. You’ll qualify for the dependent care tax credit, the earned income tax credit and the American opportunity tax credit for qualifying education expenses.

 Download our free report: Top 3 Financial Questions Before You Divorce

Sometimes divorced parents agree to alternate years of claiming their children as dependents. Or, if you have more than one child, each parent may agree to claim specific children each year. No matter what, both parents may not claim the same children in any given year. That’s just asking for an IRS investigation (which nobody wants!).

A financial advisor can help sort through the best strategies to avoid paying too much in taxes and conserving money for you and your family.

Learn about our process, DivorceFIT™, designed to help you manage the details of your financial life before, during and after divorce.

 At Atlanta Financial, we have been by the side of women divorcing for more than 30 years. Through our DivorceFIT™ process, we will walk with you through the big picture financial issues all the way to the smallest of details that need to be addressed as you go through divorce and after. Our goal is to help you transition to the next phase in your life on solid financial footing. 

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