Are you considering separating from your spouse? The 2017 tax reform made things more complicated.
For recently divorced Americans, alimony payments are no longer tax deductible for the payer, and they are not considered taxable income for the person receiving them, ending a decades-long practice. The changes affect divorce agreements concluded after December 31, 2018.
Divorce “can have a pretty significant impact on an individual’s income,” says Katie Prentke English, co-founder of Harness Wealth, a New York-based digital platform that helps individuals find financial, tax, and legal advisors.
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According to the tax experts, the tax changes benefit the maintenance recipients in most cases, since they no longer have to claim the maintenance as income and also do not pay taxes.
It could also affect social programs that dependents are eligible for, as their income appears lower than it actually is. If they don’t have to report health care alimony, their income will be lower and they could potentially get a better subsidy, experts say.
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The tax law changes also affect IRAs. According to English, if a spouse paying alimony transfers monies from their individual retirement account for use as alimony, those monies will no longer be taxed upon withdrawal. The receiving spouse then pays taxes on that money as soon as they receive it.
The new rules could limit how dependents save money for retirement.
“Recipients can’t have alimony invested in an IRA, which can be problematic for a partner who isn’t working and gets all their income from alimony,” says English.
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The new tax law also affects the divorce costs. Spouses can no longer deduct legal fees or costs related to the divorce as they used to. These are now considered personal expenses for the purposes of the law. And child support payments are not deductible by the payer or taxable by the recipient.
Prior to 2018, applicants were allowed to be exempted from child dependency. But these exceptions can no longer be used. Previously, parents could claim a child support allowance for each child they supported, which acted like a tax deduction by reducing their taxable income.
But there is still good news. According to David DuFault, attorney at Sodoma Law of Charlotte, North Carolina, a person with children under the age of 17 may still be able to claim the $2,000 per child child tax credit. And if a parent is still supporting a child over 17, they could apply for a child support loan of up to $500, he says.
A tax credit is generally better than a deduction because a deduction only reduces your income, while a credit reduces the tax you owe, DuFault explains.
“People need to make sure they’re taking advantage of these child tax credits because we don’t have dependency exemptions anymore,” DuFault says. “Be aware of any provisions in your separation and divorce records that pertain to who can claim those credits and when.”
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