Entering a divorce can be challenging, regardless of the circumstances. Whether or not the situation is amicable, emotions will likely run high, leaving little energy available for practical but necessary considerations such as the tax implications a divorce will have. While tax issues in a divorce may not be the first thought, they cannot go ignored.
The first and perhaps most important element to consider is tax filing status. Married individuals in the process of ending a marriage may file in one of two ways: married filing jointly or married filing separately. December 31st (the final day of the calendar year) determines a marital status. How an individual decides to file will greatly affect his/her tax rates, so consulting with both an attorney as well as a Certified Public Accountant (CPA) is advised in order to get the best tax rates possible.
Alimony, or spousal support, is another crucial area of consideration. The Tax Cuts and Jobs Act, signed into effect in 2017, was a major game changer for alimony. Prior to the most recent tax reform bill, alimony was considered tax deductible by the payor (person paying) and had to be claimed as income by the payee (person receiving). The TCJA now stipulates that alimony payments are no longer tax deductible by the payer. This tenet introduces a whole new dimension into divorce proceedings, and will likely result in financial ramifications for both parties.
Couples who divorced prior to December 31, 2018 had to make alimony payments in cash in order to receive deductions. Divorces settled after December 31, 2018 now allow payors to transfer funds from retirement accounts instead of making them exclusively by cash. This presents a caveat to the new rules if one spouse pays through an individual retirement account. In this case, the paying spouse will be making alimony payments with money that they otherwise would have had to pay tax on if they had withdrawn it. Similarly, recipients of these funds will then have to pay taxes on said money. This exception technically creates the same benefit as would be the case if the new tax laws did not go into effect.
While this may seem like an easy go-around, IRA transfers must be one-time transactions and must be formally expressed within divorce agreements. It is recommended to consult with a tax accountant in addition to a divorce attorney when handling tax issues, as there are many elements a CPA will be best able to advise upon. Still, divorce attorneys such as those at Romanowski Law Offices are more than equipped to guide clients through a basic understanding of the tax implications in divorce.
The newly implemented child tax credit is another aspect that has been changed as a result of the 2017 Reform Tax Bill. The Child Tax Credit is available to be claimed for children under the age of 17 and has now doubled from its previous $1,000 to $2,000. It is crucial to note that it is a credit and not a deduction. Deductions reduce the amount of income subject to tax, while credits reduce tax bill dollar-for-dollar. Additionally, up to $1,400 per child is now available as a refundable credit. In order to take advantage of the credit, modified adjusted gross income must be under $200,000. Additionally, parties must have provided at least half of the child’s support in the last year and the child must have lived with the parent for at least half of the year.
If you are looking for a lawyer for your tax issues in a divorce, you’ve come to the right place. To speak with a member of our firm about divorcing in NJ, please call 1-732-603-8585 or email us directly.