With tax season upon us, it would be a good time to remind those who are divorced about the changes in the tax code as a result of the Tax and Job Cuts Act, and how those changes can affect your bottom line.
First, if you were divorced after December 31, 2018, and you have been ordered to pay spousal support, or maintenance, you have some significant changes. Prior to the new law, the spouse paying maintenance could deduct the amounts paid for maintenance to reduce pretax income, and the spouse receiving support had to list maintenance as income. After the new law, the spouse paying maintenance can no longer deduct maintenance at all; however, the spouse receiving maintenance does not list those payments as taxable income.
Second, if a spouse transfers money from an IRA to the other spouse to pay maintenance, the paying spouse will not be taxed upon withdrawal, but the receiving spouse will pay tax on the money received. For spouses who wanted to essentially have maintenance work as monthly IRA transfers, the changes eliminate double taxation but also deprive the receiving spouse of the ability to not claim maintenance as income.
Third, spouses can no longer deduct legal fees or expenses related to divorce.
Finally, the new law eliminated dependency exemptions for children in favor of a larger head of household deduction. But the child tax credit may be an option, as well as the dependent credit for children over 17.
Individuals who have been recently divorced should be aware of how the changes in the tax code will impact their filing for this year.
If you have questions about divorce and taxes, contact us – we can help.