Understanding The Divorce Tax Rules And How They Can Affect You

The passage of the Tax Cuts and Jobs Act was supposed to simplify the tax code and make filing taxes easier, along with cut taxes and create jobs.

While the latter two are still being debated, the fact is that the tax code is more confusing. The fact is that most people don’t know how taxes work.

Taxes become more confusing when you get divorced. Yes, the recent tax bill changed the divorce tax rules.

Read on to learn more about those changes and how you can protect your finances in the middle of a divorce.

Alimony Payments

Up until December 2018, divorced couples would be able to have some tax benefit when it came to alimony payments.

The one paying alimony would be able to take a deduction, while the person receiving alimony would report the amount as income. The person receiving alimony would then pay taxes on the alimony payments according to their tax bracket.

When this law was originally many years ago, it was to help divorcing couples navigate tax complications as they transitioned from filing together to filing as single again.

The tax deduction also encouraged those who were paying alimony to pay more. The more money they paid, the bigger the deduction. That would also help receivers who made significantly less than their spouses, such as stay at home moms.

As of January 1, 2019, all of that changed. Divorcing couples would have to figure out the new changes to paying alimony. Now, the person paying alimony no longer gets the tax deduction. The person receiving alimony no longer pays taxes on it.

PayStubCreator has more details about this change and other tax changes for divorcing couples.

Navigating Divorce Tax Laws

How can you manage the divorce and these new laws? The best thing you can do is educate yourself. If you know that your marriage is heading in the direction of divorce, know what the legal and financial implications are for you and your family.

Talk to an accountant and a divorce attorney to fully understand what you’re getting into. If you’re paying alimony, you may be able to pay into an IRA, which would allow you to take a tax deduction. Your soon to be ex-spouse would then pay taxes on the withdrawals.

One thing that divorce attorneys expect is that these divorce tax laws will lead to more contentious divorces.

It was much easier for alimony amounts to be agreed upon because there was an incentive to pay a higher amount. Now that that incentive is gone, it will be harder to convince someone to pay more in alimony with no benefit.

Know the Top Divorce Tax Rules

Divorce is messy as it is. The divorce tax rules can make it much more complicated. The biggest change in the tax code is the alimony deduction. You need to be fully aware of this and other changes to the tax code before you file for divorce.

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