Divorce and Taxes - 10 Things to be Aware of - Part 2

Two things most sane people seek to avoid are divorce and taxes. Unfortunately, when you’re going through a divorce, not paying attention to taxes can cost you thousands. That’s especially true with the tax law changes that went into effect in 2018 and 2019. Now more than ever, not understanding how taxes will affect your divorce can be a very expensive mistake.

Last week we looked at 5 issues to be aware of. This week, we'll look at 5 more.

6. 529 Plans

529 Plans are special tax-advantaged savings accounts that parents (or grandparents) could create to save money for children’s college educational expenses.

In the past, 529 Plans could only be used to fund “Qualified Higher Education Costs.” That’s IRS speak for college/university tuition and certain other college or university expenses.

Under the new tax laws, parents can take up to $10,000 per year out of a child’s 529 Plan and use it to pay for that child’s elementary or secondary school tuition. Now, if your kids are going to private school, you or your spouse could want to use the kids’ college money to pay for it. That will save you from having to pay the private school tuition yourselves.

It will also leave your kids with less money (or no money) to pay for college.

The bottom line is that deciding what to do with your kids’ 529 Plans is now one more thing you’ve got to negotiate in your divorce.

7. Moving Expenses

Before 2018, if you were moving because of a new job, you could deduct your moving expenses from your taxable income. Now, you can’t.

While paying for moving expenses may not be a huge issue in your divorce, the truth is moving costs money. Since there is probably no way you will ever get to deduct those moving expenses from your taxes, you might want to think harder now about how you will pay for those expenses when you divorce.

8. Mortgage Interest & HELOC Payments

The new tax law limits the mortgage interest deduction to interest paid on the first $750,000 of your loan. To be deductible, the loan must also be used to buy, build, or substantially improve the home that secures the loan. That applies to home equity loans and lines of credit, too.

In the past, if a divorcing couple had a home equity line of credit that wasn’t maxed out, they could draw on that loan in their divorce. They could then use that cash to pay for their divorce expenses. Or, they could use it to balance out their property settlement or pay moving expenses.

When they withdrew that money, they could deduct the interest they paid on it from their taxes.

Now, you can still draw on your home equity line of credit in your divorce. But, if you use the money to pay for anything besides home improvements, any interest you have to pay will not be tax-deductible.

9. State & Local Tax Payments

Before 2018, you could deduct the amount you paid in real estate taxes on your federal income taxes. You could also deduct what you paid in state income tax, sales tax and other state and local taxes.

From 2018 on, you can only deduct the first $10,000 you pay in state and local taxes, including income taxes, real estate taxes and sales taxes.

If you’re thinking of keeping your home when you divorce, you’ve got to figure out if you can afford it. Not being able to deduct the full amount of the property taxes you pay can potentially cost you more in income taxes. That increases your expenses and reduces your cash flow.

10. Medical Expenses

Before 2018, you could only deduct medical expenses that exceeded 10% of your adjusted gross income. Now, however, you can deduct medical expenses that exceed 7.5% of your income.

While that 7.5% threshold was supposed to go back up to $10,000 in 2019, it didn’t. So for now at least, you can still deduct medical expenses that exceed 7.5% of your income.

Of course, in order to be to deduct medical expenses at all, you have to be able to itemize your deductions. If you don’t, then you’ll lose this deduction too.

If you have a lot of medical expenses, and you are getting divorced, the lower-income threshold for deducting medical expenses can be good news. First, when you divorce you can no longer file taxes with your spouse. So, you will have less income to declare on your taxes. Since you can deduct expenses that exceed 7.5% of your income, that means you will likely get more deductions.

Divorce and Taxes - Ten Things to be Aware of - Part 1

Two things most sane people seek to avoid are divorce and taxes. Unfortunately, when you’re going through a divorce, not paying attention to taxes can cost you thousands. That’s especially true with the tax law changes that went into effect in 2018 and 2019. Now more than ever, not understanding how taxes will affect your divorce can be a very expensive mistake.

1. Tax Status

The first thing you’ve got to remember about filing taxes after divorce is that your tax status is going to change. Married filing jointly is the most tax-favored way to file taxes. Once you’re divorced, you will lose that status.

Lots of people think that as long as they were married for some part of the year, they can still file taxes as married filing jointly. That’s not true.

Your marital status for income tax purposes is determined as of December 31. If you were married on December 31 you will file your taxes for that year as married. If you were divorced, your only option is to file either as a single person, or head of household.

2. Taxes on Alimony

Historically, alimony (also known as maintenance or spousal support) was tax-deductible to the person who paid it. The person who received alimony was the one who paid the tax on the income.

This was known as the alimony tax deduction, and it often made settling divorce cases easier. That’s because the spouse who received alimony was usually in a lower income tax bracket than the spouse who paid alimony. The alimony tax deduction allowed the couple to shift income from the higher earner to the lower earner. As a result, both spouses paid less in taxes than they otherwise would have paid.

Unfortunately, effective January 1, 2019, Congress eliminated the alimony tax deduction.

Now alimony is no longer tax-deductible to the person who pays it.

That means that if you’re paying alimony to your spouse you have to pay taxes on the income you earn at your income tax rate. Then you have to use your post-tax dollars to pay spousal support to your ex.

3. Personal Exemptions

Before 2018, when you filed your taxes, you got to claim yourself, and each of your kids, as dependents on your taxes. Known as “personal exemptions” or “dependency exemptions,” these tax breaks allowed you to subtract a certain amount of money from your taxable income for every dependent you claimed. The more dependents you claimed, the more money you could subtract.

Unfortunately, from 2018 through 2025, no one gets a tax exemption for claiming the kids as dependents. But then in 2025 (theoretically, at least!) the dependency exemption will spring back to life. Although neither parent will get a tax exemption for claiming the kids as dependents through 2025, theoretically, that will change in 2026 and beyond. So, if your children will still be underage in 2026, you and your soon-to-be-ex still need to decide who gets to claim the dependency exemption for them from 2026 on.

Finally, while the dependency exemption itself may not be worth anything for a few more years, deciding which parent can claim which child as a dependent may affect the child tax credit.

The bottom line is that, divorcing parents still need to decide which parent is entitled to claim which child as a dependent in any given year.

4. Child Tax Credit

Even though the dependency exemption has no value (at least through 2025) unless a parent has the right to claim a child as a dependent, that child might not qualify for the child tax credit on that parent’s income taxes. That’s why, in your divorce, you still need to negotiate which parent can claim each child as a dependent in every year.

If you don’t say who can claim the child as a dependent, you risk losing the child tax credit. The child tax credit directly reduces the amount of income tax you pay. So, it doesn’t just reduce your taxable income. It reduces your taxes.

5. Health Insurance

Not considering how claiming the children on your taxes can impact the health insurance you get for them on the Health Insurance Exchange has become an expensive trap for the unwary.

Most divorcing spouses agree to split the right to claim their children on their taxes in any given year. So either, mom gets to claim the kids in even years and dad gets to claim them in odd years, or mom gets to claim Child A, Dad gets to claim Child B, and they alternate claiming Child C. Doing this is easy and it seems fair enough.

But if dad claims Child B on his income taxes while mom gets health insurance for Child B through the health insurance exchange based on her taxes, mom might end up having to repay the government for that portion of Child B’s health insurance that the government subsidized! The same thing is true if mom claims the kids on her taxes in one year, but dad gets health insurance for the kids through the exchange based on his income.

How is Child Custody Determined?

If you have ever been involved in a child custody case or you are about to begin one you most likely have heard the phrase “best interests of the child.”

Almost every state determines child custody and visitation issues based on the best interests of the child standard.

State statutes and case law define this standard differently, but in general there are certain factors and themes that appear in the majority of states.

So when you ask the inevitable question of “how is child custody determined”, here is a general list of what the courts use to analyze the “best interests of the child,”:

• The love, affection, and other emotional ties existing between the parties involved and the child.
• The capacity and disposition of the parties involved to give the child love, affection and guidance and to continue the education and raising of the child in his or her religion or creed, if any.
• The capacity and disposition of the parties involved to provide the child with food, clothing, medical care or other remedial care.
• The length of time the child has lived in a stable, satisfactory environment, and the desirability of maintaining continuity.
• The permanence of the existing or proposed home or homes.
• The moral fitness of the parties involved.
• The mental and physical health of the parties involved.
• The home, school, and community record of the child.
• The reasonable preference of the child, if the court considers the child to be of sufficient age to express preference.
• The willingness and ability of each of the parties to facilitate and encourage a close and continuing parent-child relationship between the child and the other parent of the child and parents.
• Domestic violence, regardless of whether the violence was directed against or witnessed by the child.
• Any other factor considered by the court to be relevant to the particular family.

So playing a part in the child custody analysis will be your location at the time of the divorce, your relationship with your children, your relationship with your spouse, who was the primary caregiver, where the children have an established, familiar environment, where the children go to school, which parent is more likely to encourage the children’s current religious education, etc.

Who Gets the House in Divorce and What Happens?

You’re getting a divorce and it’s time to figure out major questions like:

• What happens to the house in a divorce?
• Why it’s so difficult to decide what to do with the house in divorce?
• Who gets the house in a divorce?
• Should I keep the house?
• What factors to consider if I want to keep the house?
• Do I have to refinance after divorce?
• What is a divorce house buyout and how does it work?

In this excellent blog posting, Sharon Pastore explores these questions in depth.

Preparing for Divorce: The Top 10 Tips You’ve Got to Know - Part 2

The more you prepare for your divorce, the more you increase your chances of getting the outcome you want. Plus, the more you prepare yourself for your divorce, the more time and money you are likely to save in the divorce process.

Last week we looked at 5 of the most important tips you will need to prepare for divorce as effectively as possible. Here are 5 more.

6. Assemble Your Team. No one should go through a divorce alone.

Trying to go through a divorce without the right help is like trying to win an Olympic gold medal without having coaches and trainers. You might be able to do it, but the odds are against you.

In a perfect world, your divorce team should include professionals to cover every aspect of divorce, including the legal, financial and emotional parts of divorce.

That means that you will be wise to work with a divorce mediator, a financial adviser, and a therapist. While that may sound expensive, there are ways to assemble a divorce team that won’t necessarily cost you a fortune.

Putting the right divorce team together takes time. If you can start interviewing and finding the right divorce professionals before you start your divorce, you will be prepared to move forward more quickly once your divorce is in process.

7. Explore Your Options. There are many different ways to resolve your divorce today, including through mediation, litigation, direct negotiation, arbitration, and Collaborative Divorce. The divorce process that you use can directly affect the outcome you get in your divorce.

But you have more options than just a choice of divorce process.

As long as you’re not relying on a judge to make your divorce decisions for you, you also have a lot of options about the WAY your divorce issues get handled.

For example, while most judges will order one spouse to pay the other child support, if you and your spouse can agree, there may be other ways to handle child support, especially if you share time with your kids on a fairly equal basis. The same thing is true about dividing your assets. Even if you and your spouse agree that you will split your assets on a percentage basis, WHICH assets each of you gets is a separate issue.

The bottom line is that divorce is full of choices. There isn’t just ONE way to do anything in divorce. Being prepared in your divorce includes KNOWING YOUR OPTIONS.

After all, unless you know what your choices are, you can’t possibly make good ones.

8. Set Realistic Goals. The most important question you should ask yourself when you’re starting your divorce is incredibly simple. Yet, most divorcing people don’t ask it of themselves. Ever.

That’s because answering this question isn’t as easy as it seems.

The problem is that unless you ask yourself this question at the beginning of your divorce, you’re probably going to be dissatisfied with the result you get at the end of your divorce.

So what is this all-important question?

What do I want?

If you don’t clearly know what you want in your divorce, your chances of getting it are incredibly slim.

Of course, just asking yourself “What do I want” isn’t the only thing you have to do. There’s a catch. (Of course, you knew there had to be one, right?)

You can’t want everything!

You need to identify the ONE, or maybe TWO, most important goals in your divorce.

Why can you only have one or two goals?

… because having too many goals is like having no goals. You can’t focus on everything at once. Knowing what you want means being crystal clear on what matters the most to you in your divorce.

Finally, in order to achieve your goal(s), they must be legally and financially possible. You can want your spouse to pay you $1,000,000 in your divorce. But if the total amount of your marital assets is only $100, thinking you’ll $1,000,000 is simply not realistic).

9. Minimize the Damage to Your Kids. If you have children, one of your top priorities is probably to make sure that your divorce doesn’t ruin their lives.

The key is to truly put your children first. While most parents intend to do exactly that, it’s easy to get so caught up in your own pain during a divorce that you don’t think about what your kids are going through as much as you otherwise might do.

So, a big part of preparing for divorce when you’re a parent means understanding what will happen to your kids in the divorce process, and then doing your best to minimize their pain. (And, btw, “kids” includes your adult children, too! Just because your children may be over 18 does not mean that they won’t be affected by your divorce!)

The kinds of things you’ll have to consider include:

• Breaking the news of your divorce to your kids in the most empathetic way possible;
• Supporting your kids’ emotionally as they try to navigate all the changes in their lives;
• Reassuring your kids that, no matter what, you love them and that your divorce was NOT their fault;
• Supporting your kids financially;
• Being honest with your kids about the ways that their lives will change after the divorce.

Whether you like it or not, your divorce WILL affect your children. You can’t control that. But what you CAN control is whether it affects them positively, negatively, or a little bit of both.

10. Make Peace With Your Divorce.

Getting a divorce is probably not what you thought you would ever be doing. It may go against everything you told yourself you believed in. It may crush your dreams of how your life was “supposed” to be, or what your future was going to look like.

Yet, divorce happens.

While most people associate the end of a marriage with failure, that isn’t always true. Ending an abusive marriage isn’t a failure. Ending a marriage in which you’re miserable also isn’t a failure. (At least, it’s not by my definition!)

What’s more, YOU are not your marriage. Even if – by your own definition – your marriage failed, that doesn’t make YOU a failure. It just makes you human.

Coming to terms with your divorce, and the whole host of emotions that go along with it, takes time. It takes work.

It also takes a lot of patience and kindness toward yourself.

Yet, if you’re willing to put in the work and be patient with yourself, you WILL get through it. You WILL find peace, and with it, a whole new life.