Divorce and the IRS: Tax obligations evolve with the New Year

New tax laws go into effect that will impact divorce in 2019.

The passage of the Tax Cuts and Jobs Act (TCJA) resulted in sweeping reform to the U.S. tax code. This piece of reform changed tax obligations for Americans throughout the country in many different ways. Three specific ways these changes will impact divorce in 2019 include:

  • Alimony. In the past, the person making an alimony payment could take a tax deduction and the individual receiving the payments would count the funds in his or her taxable gross income. This deduction was an incentive often used to negotiate a higher alimony award - and it worked. The Internal Revenue Service (IRS) reports approximately 585,000 taxpayers claimed the alimony deduction in 2016. The TCJA removed this provision. As a result, alimony payments no longer qualify for a tax deduction. Legal professionals throughout the country predict alimony rates will plummet as a result of this change.
  • Dependents. Divorce negotiations also include a discussion about which parent can claim the children as dependents on his or her tax returns. Previous tax law allowed a $4,050 tax exemption for each dependent. The TCJA eliminated this exemption. In its place, parents can now take a child tax credit of approximately $2,000 per qualifying child. Proponents of the change point to the increased standard deduction from $6,350 to $12,000 for single taxpayers to help justify the loss of the tax exemption. Critics note deductions are generally more advantageous than tax credits and argue the change will not prove beneficial for parents.
  • Modifications. The IRS applies previous tax law to those who finalized their divorce before the new year. There are exceptions. The most notable: modifications. Any modification to a divorce settlement agreement could result in the application of the new tax laws. As such, it is wise to tread very carefully if considering modifying a divorce settlement agreement.

Although these tax tips are arguably the most notable for 2019, they are not the only tax obligations to take into consideration when negotiating a divorce settlement agreement. Additional concerns include tax filing status and the deduction of medical expenses for dependents as well as any tax ramifications that could result from the transfer of assets.

The family home provides a common example. It is important to consider the tax consequence of full ownership of a family home or other piece of real estate before agreeing to the transfer. If the property is later sold, the individual owning the property could be responsible for capital-gains taxes.

Those going through a divorce can mitigate the risk of a surprise tax bill by seeking legal counsel. An attorney experienced in the impact of divorce on taxes can discuss these implications and help better ensure the risks are accounted for within the settlement agreement.