Tax Consequences of Divorce

Divorced couple fighting over dollar bills

If you are considering getting divorced, you must speak with a divorce attorney immediately. There may be potential tax consequences of divorce.

During what could be the most trying part of one’s life, it may be hard to think about how getting a divorce can affect your taxes.  There are many things that a person who is attempting to finalize a divorce this year has to think about.

Alimony/Spousal Support may be taxable

First, let’s take an example of where there is no tax debt in the relationship.  This allows the couple to only have to worry about one major thing about taxes moving forward: alimony payments or spousal support.  In the past, alimony payments made by one spouse was a tax write off, while the spouse that received the payments had to pay a tax on the amount of alimony received.  This law was changed with the passing of the Tax Cut and Jobs Act of 2017.

The new law said that starting in 2019, alimony payment will no longer be a tax deduction for those making the payments and those receiving the payments will no longer have to claim the payments as income.  Importantly, one can get “grandfathered” in to the old system if they finalize their divorce in 2018. What that this new law essentially means that if spouses finalize their divorce in 2018, the alimony payments fall under the old law; this allows a tax deduction for the spouse making payments and requires the spouse receiving the payments report the payment as income.

As long as your divorce is final before January 1, 2019 – and if Congress doesn’t change the provision again – the payments will be deductible for the payer and taxable for the payee for the life of the existing agreement. However, if you or your spouse modify your agreement in the future, the new laws would control; thus, resulting in change in the tax liabilities.

It is important that couples that are going through divorce understand this change in the law.  One spouse may try to drag things out to 2019 while the other will want to finalize in 2018.  This change is law has resulted in many contentious divorces during 2018.  If you have a divorce attorney, please do not hesitate to have them discuss this provision with a tax professional; this helps ensure they can draft the settlement properly and know your exact tax consequences of divorce .

Tax Debt

Second, the more cantankerous situation during a divorce occurs when there is debt owed jointly between the two spouses when the divorce is finalized.  It is even more difficult to manage joint tax debt.

The first thing figure out in a divorce is who is responsible for repayment of the debt.  Keep in mind that the Internal Revenue Service does not honor what the divorce decree says. The divorce decree only affects the rights of the spouses; it cannot alter the rights of third parties. For example, if the divorce decree states that one spouse must pay the joint debt, the IRS can and will go after both spouses for the debt after a divorce.  With that in mind, for the spouse that is not responsible for repaying the debt in the divorce decree, it is important to have language in the decree/property settlement agreement that gives that spouse the right to reimbursement of any money that goes towards the outstanding tax liability; whether it is future tax refunds, payments as part of a repayment plan, or levy/garnishment payments.

 

Arthur Rosatti, Esq. is a Florida licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies. His goal with their tax debt and get them into the best plan possible to manage the debt. He has experience dealing with divorce spouses dealing with their joint tax debt. If you have concerns about your tax liabilities, schedule an appointment with our office.

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