How Divorce Affects Taxes
Financial concerns are among the most important issues in a divorce. Our experience at The Law Center P.C. in diverse but interrelated areas of the law positions us to help you with the tax implications of complex and high-asset divorces.
Our attorneys are skilled in areas beyond family law and divorce, which means we are qualified to assist you with a range of divorce issues that will affect your taxes, including:
- Retirement and investment accounts
- Wills and trusts
- Real property
- Spousal maintenance and child support
Our team stays current on changing laws and can help you understand how new federal and Colorado tax laws will affect your divorce.
What You Should Know About The 2017 Federal Tax Law Changes
When Congress passed H.R. 1, the Tax Cuts and Jobs Act, it overturned years of precedent when it came to spousal support payments — otherwise known as alimony. In light of these changes, it is even more important to work with an experienced lawyer on your divorce.
Historically, spousal maintenance was deductible on the income tax return of the person paying the spousal maintenance and was claimed as taxable income by the person receiving the payments. Beginning Jan. 1, 2019, that was reversed. Now payments are tax-free for the recipient and nondeductible for the payer.
Why did Congress make this change? For years, skilled practitioners have negotiated spousal maintenance in such a way that it seemed the IRS subsidized a divorcing family. Since the payer is usually in a higher tax bracket that the recipient, it was frequently advantageous to shift a significant portion of that income to the other spouse who might have no or only nominal income. Once shifted, the income was taxed at a lower tax rate to the spouse receiving maintenance, resulting in the IRS receiving fewer tax dollars on the same money.
How The Tax Cuts And Jobs Act Of 2017 Impacts People Considering Divorce
The recent change in tax law will now have all the income taxed at the rate of the higher-income spouse. The spousal support guidelines and resulting settlements may be smaller, but the effective benefit to the recipient spouse should remain about the same. In addition, the change could mean that more money will go to the IRS instead of to families that needs the finances to support themselves.
Working under the current law helps ensure a better understanding of your potential outcome. Be sure you have lawyers with the knowledge and tools to make these calculations to maximize your benefit. At The Law Center P.C., our attorneys are experienced in the tax implications of divorce and leverage the skills of paraprofessionals to resolve your case in a cost-effective manner.