Tax guide to divorce in 2019
The Tax Cuts and Jobs Act – signed into law last year – modified the treatment of alimony payments, which will change certain aspects of divorce planning in 2019.
Under the previous statute, the higher-earning spouse could deduct alimony payments on his or her tax filings. The recipient included the payments as part of his or her taxable gross income.
However, for divorces finalized in 2019 and after, alimony payments will no longer be a deductible expense for the payer, which will have financial ramifications.
“There is no incentive to pay alimony now,” Emily Pollock, partner in the matrimonial and family law department at Kasowitz Benson Torres LLP, told FOX Business. “It’s really all just money out of the pocket for the payer … [it’s] harder to encourage that when you have no benefit to exchange.”
Typically, in a divorce where children are involved, the payer would also split support payments between alimony and child support, putting more into the former to claim the tax credit. Now, Pollock says, the payer is going to try to pay their child support and put less cash toward alimony.
Additionally, exemptions for dependents will be eliminated, and replaced – so to speak – with the child tax credit. That may prove to be a worse deal for parents because the exemption acts as a flat-out deduction while a credit goes up against the taxes you have to pay. Further, the threshold for the exemption was higher than what the credit provides.
There are a number of other factors divorcing couples should be wary of, including who to consult on financial matters.
“What many do is rely on their lawyers and they don’t understand that lawyers have legal training, not financial training,” Ric Edelman, founder and executive chairman of Edelman Financial Services, told FOX Business. Edelman added that oftentimes lawyers will advise clients to split all the assets 50-50, when in reality, that’s often too simplistic.
States also have different laws when it comes to dividing property. There are equitable distribution states, like New York, and community property states, like California. In the latter, all assets acquired during the marriage are considered marital property and subject to a 50-50 split. In an equitable distribution state, more assets are considered marital property, but the split doesn’t necessarily have to be 50-50.
To the extent that partners contribute to retirement accounts during a marriage, that money would be considered marital property and subject to division during divorce proceedings. For shared accounts, it is important to note that once a couple agrees to split the contents, they can’t touch their money until a judge orders it.
Experts also suggest keeping a close eye on your spouse’s debt payments during divorce proceedings, because a partner may try to pay down debt before assets are divided.
“Always something to keep in mind if your partner has loans … they might up their payments, because they’re like ‘why the heck not? I’m using my spouse’s money and I can decrease my debt,’” Kelly Frawley, partner in the matrimonial and family law department at Kasowitz Benson Torres LLP, said.