New Tax Law Changes and the Impact on Divorce

New Tax Law Changes and the Impact on Divorce

The laws for 2018 taxes have changed, impacting those going through a divorce. As of January 1, 2019, spousal maintenance is no longer taxable to the recipient or deductible for the paying party. Due to this change, people are looking at other options for spousal maintenance, or alimony, payments.

One option to avoid monthly maintenance payments altogether is to provide a lump sum payment. A lump sum payment is a large sum paid in one single payment rather than broken up into numerous payments over a period of time.

SPOUSAL MAINTENANCE (ALIMONY) ISSUES

There are other reasons an alimony recipient may want to request a lump sum payment, including:

  1. The payor (ex-spouse) could lose his or her job or face other financial hardship.
  2. You (the recipient) could get a job and if the payor can convince a judge that you no longer need the alimony payments to support yourself, you could lose that monthly payment.
  3. You could get remarried – once the recipient remarries, the payor is no longer required to pay you any remaining alimony. In fact, cohabitation itself is even becoming a reason for modification or termination of alimony in Minnesota.
  4. You can use a lump sum payment to buy out your ex-spouses share of your home, or you could have enough liquid immediately to purchase your own home.

NEW CHANGES TO TAX DEDUCTIONS

The tax law change has an effect on other deductions as well, for example, married couples filing jointly will now be able to deduct $24,000, compared to $13,000 for previous years; Single taxpayers have access to a deduction of $12,000 compared to the previous $6,500; and Heads of Households will be able to deduct $18,000 instead of $9,550.

If you are filing ‘Married Filing Separate’, both parties must either itemize deductions or use the standard deduction, the first party to do so establishes the requirement for the other to do the same. It is important to note that a jointly filed return cannot be amended to file separate returns once the due date has passed. However, if either spouse filed a separate return, they can be amended to file a joint return up to three years past the due date.

INNOCENT SPOUSE AND JOINT TAX LIABILITY

Worried about joint tax liability as an innocent spouse? If you are requesting relief, you hold the burden of proof. IRS Form 8857 is used to request this kind of relief. Innocent spouse relief provides relief from the payment of additional tax if a joint return was filed and all of the following conditions are met:

  1. The understatement of tax was solely attributable to spouse’s erroneous items;
  2. At the time the joint return was filed the individual did not know, and had no reason to know, that there was an understatement of taxes;
  3. Based on all facts and circumstances, it would be unfair to hold the individual liable for the understatement of tax.

Note: If an individual signs a joint tax return under duress, the election to file jointly is invalid.

DEPENDENCY EXEMPTION AND CHILDREN

So, how does the tax law effect divorced couples with children?  Generally, income tax dependency exemptions are awarded to the custodial parent. That is, the parent receiving 50% or more of the parenting time, based on overnights. In Minnesota however, Courts hold the power to award a tax exemption to the non-custodial parents under Minn. Stat. § 518A.38, subd. 7. Courts must consider: 1) The financial resources of each party; 2) if not awarding the dependency exemption negatively impacts a parent’s ability to provide for the needs of the child; 3) if only one of both of the parents would receive a tax benefit from the dependency exemption; and, 4) the impact on the parent’s ability to claim premium tax credit or subsidy. However, if a party has less than 10% of court-ordered parenting time, they shall not be entitled to receive a dependency exemption except by agreement of both parties.

This new tax effect makes it more difficult for everyone filing taxes, particularly those going through a divorce and family changes. If you have questions regarding taxes, divorce, and/or alimony, you should consult with an attorney.

At Lake Harriet Law, we work diligently for our clients, to help them receive the best terms in their divorce, including an equitable financial settlement.  If you are considering a divorce, contact our team to begin designing a legal strategy to protect your future and your interests.

Randall A. Smith – Managing Attorney             612-750-4843

Jessica Dulz – Student Attorney                          612-223-8925

Aubry Fritsch – Student Attorney                       612-223-8925

Taylor Blatchford – Law Clerk                             612-223-8925