Divorce Tax Matters
There are many tax issues that arise during the context of a divorce and our attorneys identify and analyze these issues to minimize the effect it may have. These include determining the responsibility between spouses for tax payments, allocating tax refunds and determining the net after-tax value of certain marital assets being distributed.
The question often arises as to whether or not to file a joint tax return with your divorcing spouse. One spouse may provide false information on a joint return or omit reporting income. If you sign a joint tax return with your spouse, each of you may be held liable for the taxes due. We frequently analyze the issue of whether to file jointly, and negotiate and draft tax indemnification agreements before joint tax returns are executed. We also negotiate the allocation of tax liability between spouses and the allocation of tax refunds.
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. Our lawyers identify and analyze these tax issues in the context of property distribution.
Spousal Support, Alimony Issues and Custody
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 holds true for any written Marriage Settlement Agreements or any other written divorce agreements that were entered into prior to 2019. However, post 2018, under the new Tax Cuts and Jobs Act (TCJA), the deduction to the payor spouse will be eliminated for any alimony payments required by post 2018 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.
Prior to 2018, the custodial parent was generally entitled to claim the dependency exemption on his or her tax return. Beginning with the 2018 tax year, personal exemptions for yourself or your dependents will be eliminated, however, the child tax credit increases to $2,000 from $1,000. Dependents ineligible for the child tax credit can qualify for a new $500-per-person tax credit for non-child dependents.
Counsel fees paid by you in connection with the production of income, (spousal support, alimony pendente lite, alimony), or tax advice were tax deductible as miscellaneous deductions subject to 2% of adjusted gross income. Under the TCJA, beginning with the 2018 tax year, miscellaneous deductions subject to 2% of adjusted gross income threshold are now gone.