Divorce and Taxes: What You Need to Know

Tax planning is an essential aspect of the divorce process, yet many individuals who are going through a divorce fail to adequately understand the tax consequences that may apply to them. The fact is that tax issues can have a significant impact on a divorce and even the strategy that each spouse uses during the divorce process. Furthermore, as our nation is on the brink of major changes to federal tax law, the outcome of certain tax-related situations may be uncertain in the context of a divorce. As always, you should be sure to get the most up-to-date advice from your tax professional if you have questions about how the new tax laws might affect your situation. However, there are some basic tax rules that you should be aware of as you go through your divorce.

First, there are certain aspects of federal tax law that apply to parties with minor children who are in the midst of the divorce process. Child support payments are neither deductible for the payor nor taxable income for the payee. Only one parent can claim the child for the purposes of the dependency exemption, who is typically the “custodial parent,” or the parent who provides more than half of the child’s support for the tax year. However, there are situations in which a custodial parent can be ordered to release the exemption to the non-custodial parent, if all other requirements are met. Only the parent who claims the child as a dependency exemption is eligible to claim the child tax credit, which has become much more valuable to taxpayers beginning in 2018. Although the new tax law eliminates personal deductions, it doubles the size of the basic child tax credit, from $1,000 for each eligible child to $2,000 for each eligible child. Additionally, the amount of money available as a refundable credit will rise, and the income levels at which the credit previously phased out will increase substantially.

For the past 75 years, alimony has been deductible to the payor to the extent that it is countable as gross income to the payee. However, the new tax law repeals the alimony deduction and the spouse receiving the alimony no longer is required to pay taxes on it. Some experts foresee this change as detrimental to an efficient and affordable resolution to many divorces. The concern is that the lack of a deduction for alimony will result in less money for the family in general, and, in particular, the spouse in need of support, which could make reaching a settlement in some cases more difficult. However, this provision of the tax law does not take effect immediately; the repeal of the alimony deduction will only affect divorces finalized after December 31, 2018. This change also may necessitate changes to provisions of existing prenuptial agreements, which assumed the existence of the tax deduction.

These are only a few examples of how taxes substantially impact divorce proceedings, as well as how the new tax law may result in changes to certain aspects of divorces. Taxes are only one aspect of the financial matters involved in New Jersey divorce cases. We know how difficult, complicated, and emotionally draining divorce cases can be. Contact Argentino Family Law & Child Advocacy, LLC, today and we will show you how we can help with your New Jersey divorce case. Our attorneys focus their practice primarily on family law and issues related to children, so we are sure to have the skills that you need for proper representation in your divorce case. We are here to answer your questions, settle your concerns, and assist you through the often difficult process of contested divorce and family law cases.