It’s tax season again, and for couples who got divorced in 2019, big changes are in store. Taxes are a major factor in financial planning. They can impact how divorce and custody agreements are structured. The new rules drastically change the tax landscape.
Here’s how those changes affect major financial issues in divorce and custody.
For judgments or agreements finalized in 2019 onward, new rules came into play on the federal level (individual states may vary) for alimony payments (known as maintenance in New York). The payments were deductible for the spouse paying and considered income for the spouse receiving. As a result of the Tax Cuts and Jobs Act of 2017 (see 2017 tax overhaul), the taxable impact was lost on the federal level and is no longer a deduction for the payor. However, individual states may still retain their individual tax treatment of alimony/maintenance.
Individual retirement accounts (IRAs)
The new tax laws may also have an effect on IRA (Individual Retirement Account) withdrawals that are used for alimony payments and individuals should consult with their tax professional about their specific situation.
Another change under the new tax laws is that legal fees and other divorce advice – which can be substantial – are no longer deductible with the exception of tax advice.
The 2017 tax changes eliminated dependency exemptions on the federal level. They no longer exist, regardless of when a divorce or custody arrangement was finalized.
However, individual states may still retain their individual tax treatment of child tax credits, and they may still be available on the state-level. Divorce and custody agreements should address who can claim those credits.
Navigating the new rules
Individualized guidance on these issues is critical now more than ever. Couples should not wait until April to seek help from a tax professional. And if you’re currently facing divorce or custody, make sure you find an attorney who is well-versed in the new tax rules to help you reach your happily-ever-after.