Finalize Your Divorce Before the Final Day of 2018

December 18, 2018

With the New Year comes many things: fresh starts, new beginnings, and resolutions to improve and better ourselves. Above all, this New Year’s Day brings changes to the tax code that could greatly impact families going through a divorce. So, what changes are coming, and how can you best prepare and position yourself financially?

Alimony

This is likely the biggest change on the horizon. Currently, alimony (also known as spousal support or maintenance) is deductible to the payor and taxable to the payee. On January 1, this will be treated more similarly to child support payments. This means that alimony will no longer be deductible (to the payor) nor taxable (to the recipient). At first glance, that may seem like a positive in the recipient’s case. However, this likely results in the recipient receiving less money. Additionally, it will mean that non-working spouses are no longer eligible to make IRA/Roth IRA contributions. It’s estimated the elimination of this “divorce subsidy” will raise an additional $6.9 billion over the next decade for the government – meaning $6.9 billion less in divorced individuals’ pockets.

Home

One of the biggest questions, and sometimes points of contention, in a divorce is: what happens with the family home? Already enacted tax reform has capped the deductibility of property taxes at $10,000 and lessened the amount of mortgage that qualifies for the mortgage deduction. This makes it more expensive to own a home. Furthermore, when it comes time to sell the home, a couple can exclude a gain of up to $500,000, while an individual can only exclude up to $250,000. While that law isn’t new, it is important to think of the family home as a financial asset and consider the costs of keeping the home while discussing splitting the assets. Downsizing or renting is often a difficult, but smart choice.

Personal Exemption

Since the new tax code eliminated the personal exemption amount (from years 2018-2025) children are no longer as great of a tax deduction. The personal exemption amount in 2017 was $4,050, which meant you essentially received a $4,050 deduction for each child claimed. Although the personal exemption is currently $0, it is still important to negotiate who will claim the kids. This may qualify the parent for additional child tax credits which are more generous under the new law. Moreover, the law is set to sunset in 2025 which brings back the personal exemption in future years.

For divorces that are near completion, it makes sense to push to finalize in 2018 to avoid adverse tax laws that are set to begin in 2019. If you aren’t close to the end, don’t panic. It is still important to consider the points above and how they affect your situation. Can you live with less spousal support? Is it a top priority to keep the home? Who will claim the kids? These are vital questions to answer and it is important to have an empowering team on your side to ensure you have great footing when you come out on the other side. Contact our Divorce Practice Group on the specifics of your [tax] situation or check out our latest tips on Forbes here.

Kristina Caragiulo, CFP® is an Advisor who joined the BDF team in July of 2015. As an Advisor, some of Kristina’s responsibilities include providing analysis to clients in the different areas of financial planning, maintaining client relationships, and trading and rebalancing client investment accounts. Kristina received a Bachelor of Science degree in Agriculture and Consumer Economics with a concentration in Financial Planning from the University of Illinois at Urbana-Champaign. She is a CERTIFIED FINANCIAL PLANNER™ professional.