New Tax Strategies That Could Make Divorce Negotiations Easier
The divorce process became significantly more complicated this year with the code changes. Not only did a number of Americans end up owing more than expected, but along with these changes also came a slew of unforeseen consequences. For example, the spouse paying alimony can no longer deduct the payment, and the spouse receiving alimony no longer has to pay taxes on it as income, making alimony payments in general costlier, and divorce negotiations more strained. This loss is not insignificant: for some, it amounts to thousands of dollars; and its loss becomes more and more significant as the income difference increases.
In an effort to offset some of the losses associated with the loss of the alimony deduction, as one example, a number of divorce attorneys and accountants are resorting to other money saving (creative) techniques, as we discuss below.
One way to try and get around this loss is to set up a trust for the spouse who would otherwise receive alimony. Known as “grantor trusts,” they are effectively designed to pay out income without the tax burden, and are funded with assets designed to generate income. It is essentially a property settlement that must be established after the divorce decree has been finalized. Trusts set up like these ensure that payments continue even if the paying spouse passes away and when the receiving spouse passes away, the rest goes to heirs. However, some accountants have warned that the IRS could see this is simply disguised alimony.
Property Taxes & The Family Home
Another serious aspect of voice is changed is the decision to hold onto the family home. Before the tax code change, sometimes the spouse with less income would choose to hold onto the home for the sake of the children. However, this has now become significantly more expensive to do because property taxes are no longer fully deductible, and this has led some to sell the home.
Dependents and associated deductions have also changed significantly. The $4,050 exemption per dependent has completely disappeared, although the child tax credit was increased from $1,000 to $2,000. Still, this credit starts to phase out as soon as parents reach a certain income. This has changed circumstances for a number of parents, and some have found that allowing the spouse who makes less income to spend more time with the children could end up being helpful, financially, down the road.
Consider Doing A Practice Run
Overall, the divorce process has become far more complicated in states where standards are significantly different than the new federal standards. A number of accounting advisors suggest that couples go through a practice, or “pro forma” tax filing in order to provide them with some foresight about how certain choices with respect to filing will affect them. For example, couples may find that filing taxes jointly is more expensive than filing separately.
Contact Our Florida Divorce Attorneys to Find Out More
If you live in Florida and are contemplating divorce, contact our experienced Tampa divorce attorneys at HD Law Partners today to find out how we can help.