New Tax Strategies That Could Make Divorce Settlements Easier
Now that the alimony deduction has disappeared, there are a number of new tax strategies that divorce lawyers have worked on in order to make divorce settlements easier. Divorce negotiations understandably became more difficult this year due to the sweeping overhaul of the tax code. A number of people ended up owing more than expected; and there were a number of other unforeseen consequences.
Loss Of Alimony Deduction Has Slowed Negotiations
If you went through divorce in a rush last year, or waited to finalize until this year, you likely know that the spouse paying alimony can no longer deduct the cost and the spouse receiving alimony no longer claims it as income. As a result, this has made alimony payments costlier because it effectively eliminates the tax break that often facilitated agreement between parting spouses. These changes were nothing short of significant: depending upon income, a number of individuals paying alimony were left with thousands less; with the difference more and more significant; depending upon how high the income is. This increase has most definitely slowed down negotiations.
The Option Of A Grantor Trust Instead
One technique that has been used by some divorce attorneys has been to set up a trust for exes receiving alimony such that the trust pays out income in place of alimony without the tax burden. Those who are interested in this option usually end up working with attorneys who not only practice family law, but also know about estate planning and trusts, as these entities are typically set up as grantor trusts and they must be funded with assets that generate income. They must also be set up once the divorce has been finalized or else the spouse paying alimony could end up owing taxes. In this way, it is set up as property settlement, which is tax free, and the individual who is receiving the money will have to pay taxes on its distribution. This also allows for payments to continue even if the paying spouse dies; as well as heirs to receive what is left once the receiving spouse dies. However, this option does not come without risk, as some accountants are concerned that the IRS could claim that these trusts are simply operating as disguised alimony.
Having To Think Twice About The Family Home
Changes in the tax code have also changed circumstances involving keeping the family home in some cases. While some spouses with less income have previously considered keeping the marital home for the children, there is no question that keeping the family home has now become more expensive. This is because there are a number of property taxes that are no longer fully deductible, and, as a result, some have had to sell the home. This loss of deduction for property taxes has made a significant difference to a number of families’ finances.
Dependents No Longer Tax Deductible
In addition, the $4,050 deduction for dependents was eliminated, even though the child tax credit was increased from $1,000 to $2,000. In addition, this credit is phased out when one reaches a certain income and, therefore, has turned into negotiation tool when it comes to the spouse with lower income. Some families have also decided that allowing the spouse with less income more time with the children, as this could end up being financially more profitable.
Practice Tax Filings
Another technique that’s being used in order to prepare individuals to know what to expect is first doing a “pro forma” or practice tax filing. This allows people to know how their spending will be impacted going forward and, as a result, if they should perhaps move forward differently. For example, if a couple files her taxes jointly and then end up owing more than they did last year, they might change their minds and, instead, file separately.
Speak with Our Texas Divorce Attorneys
There is no question that divorce now has a different impact on an individual’s finances; both in the moment, and in the future. Our Brownsville family law attorneys have a solid background in both family and divorce law, as well as civil litigation and corporate law. We can provide you with the very best in legal advice for your divorce. Contact us at Colvin, Saenz, Rodriguez & Kennamer, L.L.P. today to find out more.