- David T. DuFault is an estate planning, tax, and business attorney at Sodoma Law in Charlotte, NC.
- Tax season is upon us, and there may be extra complications for couples that are divorcing or separating.
- Recent changes to tax law have altered how alimony and dependents are handled for divorced and divorcing couples.
- Even if you don't think you need to file, it's worth looking into whether it may be beneficial for you.
- Visit Business Insider's homepage for more stories.
The start of each new year brings a series of new beginnings. Resolutions to exercise more, eat less, and become the person we all know we can be — at least through the first few weeks of January.
While much of this keeps us occupied personally, as we move into March tax forms such as W-2s and 1099s start to fill our mailboxes. For some, the opening of "tax season" brings joy — the happy anticipation of filing tax returns, confident of refunds.
For many others, the arrival of the dreaded "tax documents" conjures feelings of nervousness, concern, or just plain fear.
For a couple amid a divorce or separation, tax season may require additional thought and planning, especially in light of recent tax law changes that have had a profound impact on how separated and divorced couples face their tax obligations.
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Alimony
For decades, the tax treatment of alimony was clear. A spouse paying alimony deducted those payments from taxable income, while the recipient of those payments was obligated to include that amount as part of taxable income.
For couples who divorced or entered into a separation agreement during the 2019 calendar year, the rule for alimony changed. Alimony payments made pursuant to a 2019 or later divorce or agreement were no longer deductible by the paying spouse or included in the income of the recipient spouse. This was a hot topic among domestic attorneys at the end of 2018, since agreements put in place through December 31, 2018 got treatment under the old rule.
Additionally, existing agreements in place prior to January 1, 2019 were to continue to receive tax treatment under the old rule, unless modified and the modification expressly states that the payments are non-deductible/non-includable.
Exemptions and credits for children or dependents
Another area recent tax changes impacted is deductions and credits available because of dependents or children. Prior to the 2018 tax year, taxpayers could claim a deduction from income for personal exemptions, usually a spouse, child, or parent. Starting in 2018, however, personal exemptions are no longer a part of the tax return. Instead, the effect of that deduction is to be addressed through withholdings in the taxpayer's payroll.
In the last year that personal exemptions were available, a taxpayer could claim a $4,050 deduction for each exemption. For separating or divorcing couples with children, the ability to claim this deduction was often awarded to one spouse or the other, or even alternated between odd and even years. A spouse who negotiated a separation agreement such that they were entitled to the personal exemptions for the children lost that deduction entirely in 2018. While not as beneficial as a tax credit, however, the loss of that deduction would still cause an increase in taxable income.
Not all the tax changes have had a negative impact, however; in particular, the tax credit for children and dependents have proven to be a positive change to most taxpayers.
Tax credits provide a greater benefit than tax deductions, in that the credits offset taxes owed dollar-for-dollar, whereas tax deductions only serve to reduce the income on which the tax is owed. The last tax reform increased the amount of the tax credit for children (note: to qualify the child must be under the age of 17 for the full tax year, so a child who turns 17 in December does not qualify) from $1,000 per child to $2,000 per child.
Additionally, up to $1,400 of this credit is refundable, meaning the taxpayer could be entitled to a refund even if there was no tax liability.
As with the deduction for personal exemptions, it was fairly common to see parties negotiate who could claim the child tax credit. With the increased amount and the increased refundability, this will continue to be an impact to both an existing separation instrument and those to be executed in the future.
A similar tax credit was created for dependents. For separated or divorced couples, a 17-year-old child in high school or a 23-year-old child in college would both likely satisfy the definition for a dependent. The dependent credit is only $500 per dependent, and it is not refundable. It will serve to reduce any tax liability to zero. Again, for agreements in 2019 and later, the dependent credit may be a negotiating factor when the discussion centers on property taxes.
Do I need to file?
Each taxpayer's situation is different, but even if you don't believe your income has reached a level that would require filing, you should still investigate whether submitting a return might be necessary or beneficial. Refundable tax credits, like the refundable portion of the child credit and the earned income credit, might mean you're entitled to a refund that you didn't realize. For a single parent with modest income raising a child or children, the earned income tax credit could entitle the taxpayer to a refund when no tax is owed.
Regardless of whether you love or loathe tax season, between now and April 15th taxpayers should begin the process of assembling their documents — employer-issued forms, investment statements, and separation or divorce documents — to be sure they can meet the tax-filing deadline.
And while tax season can be challenging, there are resources available to make a necessary process a little less intimidating. Multiple national tax return preparers offer low-cost and even free options to file returns, and CPAs and tax preparers are excellent choices for help. Start early, ask questions when necessary, and you might find tax season to be a lot less stressful.
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