Divorce And Taxes Just Got Uglier
Divorce is typically messy, painful and downright ugly.
Taxes are no day at the beach either. And, if you get divorced this year you can count on both being uglier than ever come next tax season for anyone paying alimony. That’s right if you were divorced in 2018, you’re fine. But, if you postponed your divorce or couldn’t go through with it before and now you are, you may want to discuss the tax repercussions with a professional first.
What Could Make Divorce Messier
Here’s how divorce gets messier. There’s been a new agreement between IRS management and TIGTA. They agreed to “program and use filters to select tax returns for audit to determine if taxpayers are eligible for the deduction for alimony payments, and to revise Form 1040, Schedule 1 to request the date of divorce or separation agreements.”
So, if you get divorced this year and you have to pay alimony and think you’ll be able to claim it as a deduction, wrong! Alimony is no longer a valid deduction. That’s going to make a lot of divorced taxpayers pretty angry. But it probably won’t put an end to divorce either!
Thanks To The 2017 Tax Overhaul
You have the 2017 tax overhaul to thank for this one. The new tax law eliminated or sharply limited various traditional tax deductions, including the alimony deduction. Only taxpayers who make payments under divorce or separation agreements entered into prior to Jan. 1, 2019, can continue to claim a deduction for payments made. And those divorced individuals who receive alimony pursuant to these agreements are supposed to continue to report the payments as income on their tax return.
The IRS has stated that, “This issue will first be applicable to tax year 2019 returns and we anticipate controls will be in place when these returns are filed in 2020.”
How The IRS Determines Who Gets Audited Under This New Agreement
According to the IRS, their current plan for determining if a taxpayer is eligible for the alimony deduction claimed after Dec. 31, 2018, is “to program filters that evaluate a taxpayer’s filing history with regard to the alimony deduction to determine if alimony was paid prior to tax year 2019. IRS management stated that they would use the filters to select tax returns for audit. The volume of tax returns selected will be dependent on available resources and appropriate dollar thresholds.”
Here’s How It Gets Messy
So here’s the tricky part. This law may discourage many payers from agreeing to pay alimony, making a messier, complicated divorce more likely. According to some divorce lawyers, they now fear the fallout could impact child support payments, which are often calculated in tandem with alimony settlements.
Allowing the deduction often saved up to about 50 percent in taxes for top earners in high-tax states, such as California and New York. For every $50,000 in alimony paid, it only costs $20,000 after-tax to the payer. The recipient, on the other hand, may only have to pay $10,000 in taxes on that $50,000. The net savings to the family is $40,000.
The alimony tax deduction has often been called the “divorce subsidy” and it has on many occasions prevented some divorces from going to trial, especially when the divorce is extremely financially contentious. As CNBC.com reported, “According to the American Academy of Matrimonial Lawyers, 95 percent of respondents expect that the new alimony rules will change how divorces are settled.”
Just when you thought divorce couldn’t get any worse, just wait until you have to file your 2019 taxes.