It may seem counter-intuitive to suggest to a Minnesota couple to plan their divorce, yet like other significant financial events during one’s life, understanding the realities and preparation make the split easier for all concerned. The economic burden of establishing two separate households cannot be ignored, and the Trump administration’s Tax Cut and Jobs Act passed in 2017 has provisions affecting divorced couples beginning this year.
The new provisions change the way in which child support and alimony are reported for income tax purposes. As regards child support, the new tax law eliminates dependent exemptions and increases standard deductions. A divorced parent can claim head of household status if unmarried, pays for more than 50 percent of the child’s expenses and the child lives with that parent more than 50 percent of the year. With one child, only one parent can claim HOH status.
The prior tax law allowed the payer to deduct alimony as a means to reduce taxable income and thus his or her income tax. The recipient, however, had to declare the alimony as income. The net effect was less tax revenue for the government as the payer was likely to be in a higher tax bracket than the recipient. This will be changed for new divorce agreements beginning January 1, 2019. Subsequently, alimony payments will be regarded as a tax-neutral event.
The end of a marriage is a difficult time emotionally for all, but the divorce legal issues cannot be ignored. As the couple take steps to move forward with the rest of their lives, a divorce lawyer may be able to explain the impact and consequences of the new tax laws.