Divorce is never a pleasant experience. Ask people who have ever been divorced. You will realize it’s a turbulence period in one’s life. Perhaps you thought you would be spending the rest of your life with the love of your life, but things didn’t work out as you expected. It’s a hard scenario to come to terms with.
Generally, divorce is an event that can change your life socially, legally, financially, and emotionally. Some of these changes are obvious. For instance, you will divide property with your spouse and pay or receive alimony or child support. Have you ever thought about the possible financial impact of divorce and the relevant tax implications? Here are different elements of divorce and their tax implications.
Alimony or Spousal Support
The 2017 Tax Cuts & Jobs Act (TCJA) impacted divorcing couples in many ways. For many decades, spousal support paid to an ex-spouse was a deductible from the payer’s tax. The recipient would report the amount of alimony received as income on taxes. However, TCJA has changed this norm about spousal support.
For all divorces finalized before 2018 December 31st, spousal support got a pre-TCJA tax treatment. For all divorces finalized in 2019 and thereafter, spousal support will no longer be a deductible to the payer’s taxes or an income to the recipient.
The TCJA eliminated personal exceptions for tax years 2018 to 2025. Every exemption you claimed allowed to exempt $4000 income from being taxed. This was once worth a significant amount to fight for the custody of your kids as your dependents on your income tax return. Unfortunately, this incentive is now gone, though temporarily.
Well, there are few incentives to claim your kids as dependents on your income. Some tax credits are available under the new laws to ex-spouses who claim children on their income tax returns. The law allows the parent with the physical custody to claim the kids as dependents. You can still release this right to your ex-spouse on an annual basis. Remember, you and your partner can negotiate about who will claim the kids, depending on who is likely to get the most benefit.
Generally, Florida upholds equitable distribution theory. That means all marital property should be divided between divorcing parties in a fairway. That said, not all assets are equal. Some assets could offer you a tax advantage or sometimes cause you to take a significant tax hit in the future.
Let’s consider the marital house. If you owned a house as a couple, the chances are that you are paying a mortgage. You both benefited from deducting mortgage interest on income tax. During the divorce, it will make sense for the individual taking the property and presumably the loan to have these deductions after the divorce.
However, the new law has minimized the deductibility of mortgage interests and the amount of mortgage that’s eligible for such deductions. In this case, getting the home during property division is somewhat a burden financially than it was a few years back.
Other Tax Implications
Most tax considerations during divorce have nothing to do with the recent amendments of the tax law. For instance, transferring non-liquid assets between the ex-spouses may have tax consequences. These non-liquid assets include;
- Stock options
- Broker funds
- 401 (k) and 403 (b)
- Thrift savings plans
- Certain annuities
It’s worth mentioning that most tax implications of divorce are not obvious upfront. You cannot adequately prepare for these implications unless you fully understand them. As with all other complicated aspects of divorce, it’s best to seek legal counsel from an attorney with an in-depth understanding of Florida’s divorce and family law matters.