When the emotions are taken out of it, the divorce process resembles the dissolution of a business contract. The elements of the contract of divorce that need to be resolved include distribution of assets, child custody, and child and spousal support. The Tax Cuts and Jobs Act of 2017 had a profound impact on how these details are negotiated. The following will consider some of the strategies that can be used to ease the tax obligations that come along with divorce.
Place Alimony in a Trust
As a result of the 2017 revision to the tax code, spouses who finalize a divorce now and are required to pay alimony can no longer deduct the cost of alimony from their taxable income. Additionally, the spouse who receives alimony is no longer required to report the amount received as income. Due to these changes, alimony payments are now more costly for paying spouses. One of the ways to decrease these costs is to establish a trust that will pay a former spouse an amount equal to the alimony without any associated tax burdens. There is still a risk with this type of trust, however, that the Internal Revenue Service could review the payments as disguised alimony and a person could end facing tax consequences.
Selling a Family Home
One type of asset that is greatly affected by the 2017 tax code revisions is the family home. Many people who want to keep their home after a divorce have discovered that it is now much more expensive to retain ownership of that asset. One of the most common solutions in this situation is to sell the family home. After the home is sold, the profits are either divided between spouses or are given entirely to one spouse. Deciding to sell a family home, however, can be a challenge due to sentimental and logistical factors.
Arrange Who can Claim Dependents
Another substantial element of divorce that was impacted by the 2017 code is how children are treated in a divorce. Children are now a much smaller deduction on a person’s taxes. Some spouses still decide, however, to exchange credits for dependents to a spouse in exchange for some other asset or tax advantage during divorce negotiations.
Practice Before Filing Your Taxes
The only way to have a clear idea of what your tax situation is likely to be following a divorce is to practice calculating the amount that you owe. There are a number of elements that changed in the tax code and it can be easy to overlook a small change that can impact the amount that you owe in taxes. In some cases, a person might discover that divorce has provided some unexpected advantages come tax time.
Speak with an Experienced Divorce Attorney
There are a number of complex tax issues that can arise during the divorce process as a result of new tax laws. If you need the assistance of an experienced divorce attorney, contact Vayman & Teitelbaum P.C. today to schedule a free initial consultation.