Atlanta Financial Blog
How Tax Law Changes Impact Divorce Outcomes
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.
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.
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:
- You’re unmarried as of December 31 for the tax year in which you file.
- You paid at least 50% of the cost of running your home during the tax year in which you file.
- 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.
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.
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.
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law on December 20, 2019. With all of the discussion in the news around the political uncertainty, impeachment, and the looming trade war, one of the largest changes to retirement savings laws in recent years was passed with very little fanfare. However, some of the changes will be significant. I have tried to highlight what may impact the majority of our clients and readers.
The Act has a lot of positives such as simplifying rules and making 401k plans potentially available to more workers, pushing back the RMD age, and allowing contributions to IRAs past age 70. The negative impact I see is the elimination of the stretch IRA which is a clear move by the government to raise tax revenues by forcing money out of inherited IRAs sooner. I will discuss in more detail below, but this should be a time to review beneficiaries and discuss whether any change in your legacy planning should be made in response to the new laws. What do you need to pay attention to?
A few months ago, I saw a sale sign in front of my neighbor Gina’s house. She’s lived on my street even longer than I have, so I was surprised that she was selling her home. I bumped into her a week later at the supermarket and asked her where she was planning to move. She told me (with some regret) that she was downsizing to a less expensive house. The alimony payments she’d been getting from her ex-husband had ended last year, and she hadn’t prepared for the loss of that income. She soon realized she could no longer afford to live in her home.
I’d like to believe that everyone understands the value in a year-end review of their personal finances. Statistics that I’ve seen indicate that over half of people who make resolutions indicate a change to household finances and saving money is a priority in the new year1. What is a bit of surprise to me is that so many put off (or neglect all together) actually reviewing their finances before year’s end. My conclusion: one of the biggest deterrents is the time it takes to get things organized.
When it comes to being successful with money, strong organization will empower you more than anything else you can do to take control of your finances moving forward. With my personal and professional understanding of the challenges of this process, I’ve put together an 8-step checklist to get your finances organized, take inventory of where you stand, and ultimately get you ready to close the books on 2019.