Filing your tax return for the first time after finalizing the divorce agreement (“Stipulation of Settlement”) or as you are proceeding through your divorce can be stressful, particularly if you have never been responsible for these kinds of financial issues, and even more so if you have procrastinated, and now, the deadline looms.
Filing your first tax return after divorce.
Further, if your former accountant is now your spouse’s accountant, you may find yourself scrambling to find a new tax professional.
As a taxpayer, your marital status on December 31st is your filing status. If you are not legally separated or divorced as of December 31st of the relevant tax year, you should file as married filing separately or married filing jointly. Of course, you should consult with your accountant to see which status benefits you best economically.
And if you’ve already executed your divorce agreement, you should also check to see what if any provisions for filing jointly or separately it provides and be sure to show the final agreement to your accountant, subject to any confidentiality requirements. It is imperative to understand what filing status most benefits your case.
For example, if your family unit will benefit financially from you and your spouse filing together and if you instead file separately and therefore cost the family unit more monies in taxes, you may be held responsible for a wasteful dissipation of marital assets. On the other hand, if you have reason to believe that your spouse is not accurately reporting income, expenses and other information, then your accountant may advise you to file separately.
While one remedy may be to execute an indemnification agreement, where you are indemnified by your spouse for your spouse’s misreporting of income, expenses and other information, the truth is that the Internal Revenue Service may not consider that indemnification agreement binding.
If your divorce is finalized or if you are in the process of divorcing, here are a few questions you should ask and topics you should be prepared to discuss when meeting with your tax professional and preparing a tax return.
What Does the Law Provide in Terms of Dependency Exemption and Child Tax Credits?
The new tax law has removed the need to argue over the tax dependency exemption as it no longer exists. While the new law has no bearing on the 2017 tax return, for the years 2018 to 2025, the children’s tax dependency exemption is no longer applicable. On the other hand, the head of household exemption is still applicable. To qualify, the children must live with the parent more than 50% of the time.
In accordance with the new tax law, there is a child tax credit available for qualified children under the age of 17 years. This is a credit and not a tax deduction, which means that the credit will actually reduce the amount of taxes owed dollar for dollar. In the year 2018, for each qualifying child, you can claim a $2,000 credit. You need to also qualify, which means that the credit must be under the cap—the cap is 15% of your earned income over $4,500.
The child tax credit will also phase out if your income exceeds a certain amount. For full credit, a person filing single must earn less than $200,000 and if you are married filing jointly, you must earn less than $400,000.
All changes to the new Child Tax Credit expire after December 31, 2025.
How Should I Handle Child Support and Spousal Support/Alimony?
First, child support cannot be reported as income, as it is not taxable to the payee nor is it a tax deduction for the payer.
If you entered into a divorce agreement before the end of the 2018 tax year, alimony will continue to be considered a tax deduction for the payer and taxable income for the recipient.
NOTE: A significant implication of the new tax law is eliminating the tax deduction for alimony on divorce agreements executed after December 31, 2018.
What About the Family Home – are There any Tax Changes I Should Know About?
Tax issues surrounding the family home have also changed.
- The limit on a deductible mortgage has been reduced from $1 million to $750,000. The $750,000 deduction will apply to all loans taken after December 14, 2017. Loans taken for $1 million prior to that date will still be eligible.
However, when the divorce agreement requires that one spouse is removed from the mortgage and the other spouse has to procure a new loan, the new loan may trigger the loss of the $1 million dollar deduction and reduce it to $750,000.
You need to check to see if a requirement in your divorce agreement to refinance your mortgage and the actual refinancing has reduced your deduction to $750,000.
- There is now a limit on how much you can deduct for property taxes. Previously, you could deduct all property taxes; now, there is a limitation to this – with a $10,000 annual cap on state and local property taxes.
- Moving expenses are no longer deductible. If you are moving out of the marital residence, beware that your moving expenses will no be longer deductible – with some exceptions if you are a member of the military.
- The interest paid on a home equity loan may not be tax deductible. The new tax law suspends the deduction for home equity interest from 2018 to 2026 — unless the loan is used to “buy, build or substantially improve” the home that secures the loan.
Divorce has a significant impact in many areas of life, including filing income taxes. Just like most legal and tax matters, every case is unique. While the above advice is meant to cover basic areas in a generalized way, always consult a tax professional if you have questions about filing your first tax return after divorce.
Lisa Zeiderman is a matrimonial lawyer, Certified Divorce Financial Analyst and managing partner at New York law firm Miller Zeiderman & Wiederkehr, LLP, who has extensive experience with prenuptial and postnuptial agreements, child custody, high net worth divorces and complex financial matters and litigation related to marriage and divorce. www.mzwnylaw.com