Couples divorcing in Pennsylvania must consider not only their ideal property, support, and custody arrangements but also the tax implications of those various arrangements. Many tax issues can arise during the context of a divorce, and the dedicated and knowledgeable Pittsburgh divorce lawyers at Bunde & Roberts, P.C., have years of experience identifying and analyzing these issues to minimize their effects. Our divorce lawyers advise Pennsylvania couples on a variety of considerations, including determining the responsibility between spouses for tax payments, allocating tax refunds and determining the net after-tax value of certain marital assets being distributed.
Our clients often ask whether to file a joint tax return with their divorcing spouse. The best approach depends on the specific circumstances of each divorcing couple. There are a few potential drawbacks of filing jointly while divorcing: One spouse may provide false information on a joint return, for example, or omit reporting income. If you sign a joint tax return with your spouse, each of you might be held liable for the taxes due.
The divorce attorneys at Bunde & Roberts frequently analyze the issue of whether to file jointly. If the parties choose to do so, our divorce attorneys will help mitigate the risk. For example, we can negotiate and draft tax indemnification agreements before joint tax returns are executed. We can also negotiate the allocation of tax liability between spouses and the allocation of tax refunds.
The distribution of property in a Pittsburgh divorce may also give rise to tax considerations. Certain types of assets include deferred taxes. For example, distributions from a traditional IRA will generally be taxed in the future when the payment is made and at the tax rate of the owner at the time the payment is made. If the IRA is distributed to one of the parties in the divorce, failure to consider the net value of the IRA after considering the future tax consequences may be unfair to the recipient. The experienced attorneys at Bunde & Roberts identify and analyze these tax issues in the context of property distribution.
Spousal support, alimony pendente lite, and alimony may be taxable to the recipient spouse and deductible from the income of the payor spouse if various IRS requirements are met. This primarily holds true for any written Marriage Settlement Agreements or any other written divorce agreements that were entered into prior to 2019. However, the rules about tax allocation recently changed after the passage of a new federal tax law.
As of 2018, under the new federal Tax Cuts and Jobs Act (TCJA), the deduction to the payor spouse has been eliminated for any alimony payments required by Marriage Settlement Agreements or other written divorce agreements setting forth the terms of alimony. For the payee spouse, the inclusion of alimony payments as income is also eliminated. The effect has been to remove an incentive for wealthier spouses to agree to higher alimony payments; payors no longer receive an accompanying deduction. Alimony negotiations have become more contested as a result.
The TCJA also affected tax exemptions for parentage. Before 2018, the custodial parent was generally entitled to claim the dependency exemption on his or her tax return. As of 2018, personal exemptions for yourself or your dependents have been eliminated. However, the child tax credit increased from $1,000 to $2,000. Dependents ineligible for the child tax credit can qualify for a $500-per-person tax credit for non-child dependents.
Certain other deductions were removed under the TCJA. Counsel fees paid by clients in connection with the production of income (spousal support, alimony pendente lite, alimony) or advice regarding taxes were previously tax-deductible as miscellaneous deductions subject to 2% of adjusted gross income. Under the TCJA, as of 2018, miscellaneous deductions subject to the 2% of adjusted gross income threshold are now gone.
At Bunde & Roberts, P.C., our Pennsylvania divorce lawyers are experienced and skilled in the tactical and strategic analysis required to make these important tax related decisions. We work with you to ascertain the best approach based on the divorce tax implications, types of assets and liabilities at stake. If you are considering divorce in Pittsburgh or throughout Western Pennsylvania, call the Pennsylvania divorce law firm Bunde & Roberts, P.C., today at 412-391-4330 for a consultation.
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