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New Divorce Tax Rules Can Make A Huge Financial Disadvantage

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   By John Wolf 

A divorce is a hard moment in peoples lives; nothing pleasant come with it. A broken family is not a happy moment in life. It is not only emotionally side hard to recover, but there are also the legal issues about who is going to stay with the kids and the untangling of your and your wife assets. You will go into a new reality where all that you two built together has to be divided.

As it was not hard enough, there are the new tax changes in effect that could make the process even more difficult. The US government, after the 2017 tax reform will start applying the tax changes on divorcees. We will review the new status of the tax laws and their influence of the èople that are divorced and have to pay different taxes now. Read below:

1. Alimony Payment Is Next to Tax Payment.

The tax changes of the Tax Cuts and Jobs Act (TCJA) are related to divorce starting in 2019.

Alimony is the first and most significant change for 2019. The alimony law was passed 70 years ago, and its first change since then will take effect on January 2019. The difference is quite substantial, instead of not paying tax on the amount of money paid under the definition of alimony, it will be taken as income, and the taxes will be paid by the party that pays the maintenance. Alimony was a deductable. The spouse that got the payment had to add it to his or her tax return.

Starting on January 1st, 2019, the new law is in effect. The spouse that pays the alimony will first pay the taxes on all his taxable benefits and then pays the alimony. The party that is paid will not pay taxes on this income. Taxes are not charged twice on the same revenue.

This change will make the payers of alimony, mostly those who have a higher income to fight for the lower amount of alimony, as the higher income they have they are on, the higher tax brackets. The old law let them go a bracket or two below, what could save them a big part of the alimony in a lower tax.

The table below shows the difference that alimony payment can make on the tax according to the brackets $12,600.00

Revenue 157,500.00 157,501.00
Percent tax Tax to pay Percent tax Tax to pay
24.00% 37,800.00 32.00% 50,400.32

 

The difference will make the receiver and the payer off alimony check the reality of their taxes.

Women who see their income fall after a divorce may suffer more from this change, which can make the fight on alimony and childcare uglier. Depending on the income level is the outcome of this change for the divorcees. The government will collect $6.9 billion as a result of this change on the law for alimony tax pay. 

Alimony Tax Change Upends Payments in Divorce Negotiations

Divorcing couples are shrinking alimony payments and transferring securities to former spouses instead, now that they can no longer write those payments off, divorce lawyers say.

2. Grandfathering Policy

If you are already divorced before the new law takes its effect, try not to change the amount of the alimony you agreed to pay, the change will make your status to be as a new divorcee and you will have to go like the new law rule, pay tax first and the alimony will not be accepted as your other payment that is considered as tax free.

If you renegotiate your alimony it may open up the new legal changes. We are not sure if it will be changed, but it is more likely to happen. You need to be careful about changing your alimony payments.

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3. Changes In Child Tax Deductions

Before the tax reform, the taxpayer could deduct from his or her tax return $4,050 for each dependent they have. Starting on January 1st, 2019 the deduction was eliminated by the new law until the year 2025.

In the other end, there is help from the government, by doubling the child tax credit. From $1,000 to $2,000, this will offset tax-paying owed to the IRS.

Tax Law Changes in 2019 That Might Affect Your Family

Child Tax Credit Test

  • The child must be under age 17. More precisely, your child must have been 16 years or younger on the last day of 2018.

  • The child must be related to you. That includes your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, your grandchild, niece or nephew, or legally adopted a child.

  • You have to present the child as a dependent on your federal tax return.

  • The child must be a US Citizen, US National, or a US resident alien with an SSN.

  • The child must have lived with you for more than half of the tax year. Note: there are exceptions to the residency test, such as absences related to school, vacation, military service, and medical care.

  • The child must not provide more than half of his or her support.

The new child tax credit eventually phases out for married taxpayers filing jointly with an income of $400,000 ($200,000 for all other taxpayers).

4. PreNup And PostNup Agreements 

Pre-existing prenup and postnup agreements policies are not evident in regards to how the new law will treat these agreements.

There is a possibility that the new law will make changes to some aspects of the agreements. Support by the spouse up to a certain amount may not be deductible.  

 Couples that are living through a divorce proceeding should need to review their agreement with the professional help of a CPA or tax divorce attorney.

The new tax reform changed the reality of divorce agreements so it is essential for the couples that have this kind of agreements or those who are in a divorce proceeding to learn how it may affect their economy and tax paying.   

5. Attorney Services No Longer Deductible

Like it is enough with the changes on alimony and tax-paying, the cost of the lawyer you need to get divorced is no longer tax-deductible. Before the tax-reform, you could deduct what you paid the lawyer for the divorce from your tax report. That means that your lawyer will effectively cost you more under the present tax law. A divorcing couple will need to find a way to save on the lawyer’s fee, at list the tax that is paid now on this money.

New tax law eliminates alimony deductions — but not for everybody

Alimony Payments through retirement funds  

Current rules alimony payments required cash payments to get a deduction. For the new divorcees that are done under the new tax law, there is an option to transfer the amount from your retirement funds instead of using cash from your present income. Using the retirement fund money will save you the tax on the alimony.  Divorce 2019: How to use IRAs and 401(k)s to ease future alimony planning

Example: John and Mary negotiate an alimony agreement in 2019. After the divorce, John will be in the 35% tax bracket and Mary in the 22% bracket. They are considering having John transfer pre-tax retirement savings to her. These may come from a traditional IRA, 401(k) or other pre-tax savings plan. John can do this through a property division or perhaps even a lump-sum payment of alimony.

How the Present Divorce Tax Laws Will Affect You

 We are sorry about any divorce, it is a family crisis, and nothing pleasant is in its proceedings. The last changes in the tax law are making it even worst, and more complicated. We in paystubmakr.com hope that the above information will be helpful for you. Check out our blog that has more information about tax changes and more information that can help you with HR and a new job, Workplace problems and solutions, and wages managing for self-employed. You can enjoy creating a pay stub for proof of income.

 

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Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice.  We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action.  The information presented on this website is offered as a general guide only.

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