It might be surprising to learn that a large number of divorce settlements fail to contain tax provisions. Even though many people fail to pay attention to tax issues while engaged in divorce, it is critical for people undergoing divorce to understand some of the important tax repercussions.
Changes in Tax Rates
In the first year following divorce, a person is no longer able to file as married filing jointly. Even though this might have minimized your tax burden in the past, there is a risk that you might lose some of these benefits after divorce. Some of the changes that might occur in your taxes include changes to real estate taxes after selling a marital home, losing the ability to deduct any or all of your children as dependents, and being required to pay additional taxes on alimony payments if alimony is part of your divorce settlement.
The Dependency Deduction
If used properly, many couples are able to benefit from dependency deductions. If former spouses have multiple children, sometimes they decide to split the number of children that are capable of being used on a tax return. Other former spouses decide to alternate the child that is used as a dependent each year. Unfortunately, sometimes former spouses do not appropriately use dependents which can result in lost tax advantages.
Former spouses sometimes decide to buy one another out of equity interest in marital homes or companies. Because some spouses do not have an adequate amount of money to buy out a spouse’s interest, sometimes spouses enter into installment agreements for one spouse to pay the other over a period of time following the divorce. If it is considered a payment “incident to a divorce,” there is a good possibility that the payment will be able to be transferred between former spouses tax-free.
Many spouses are able to take deductions on a marital home, but following a divorce, these deductions can sometimes no longer be used. Usually, if one spouse buys the other spouse out of a marital home, the tax advantages of a home can still be used. In situations in which both spouses still live together following a divorce, they often agree to split equally all mortgage interest and taxes until the date that one spouse moves from the home.
Alimony Payments and Taxes
Alimony payments can have substantial tax consequences in a divorce. For many years, alimony was taxable as ordinary income to the recipient and tax deductible to the payer. Following January 1, 2019, however, the Tax Cuts and Jobs Act has changed this law regarding alimony. Instead of the previous law, alimony payments are not deductible by the payor and are not included income by the recipient.
Speak with an Experienced Family Law AttorneyIf you have questions about one of the numerous tax issues that can arise in divorce, you should not hesitate to speak with an experienced attorney. Contact Vayman & Teitelbaum P.C. today to schedule an initial free case evaluation.