The Tax Cuts and Jobs Act (TCJA) that the president signed into law in December 2017 calls for the elimination of tax deductions for alimony payments made to a former spouse beginning on Jan. 1, 2019. Similarly, alimony recipients will no longer be required to include those payments as taxable income on their annual tax return filings. The law applies to divorce and legal separation agreements executed after Dec. 31, 2018. Taxpayers with alimony orders in place prior to Dec. 31, 2018, will not be affected, and payors will continue to receive preferential tax treatment for the spousal support they pay. However, it is important to note that the alimony provisions of the TCJA will apply to future modifications of support orders in place prior to Dec. 31, 2018.
The TCJA upends settlement strategies in divorces. Because the individual who pays alimony is traditionally in a higher tax bracket than the alimony recipient, the tax savings on the payor’s deduction is currently worth more than the amount of tax paid by the recipient. Essentially, because each dollar of alimony paid to a recipient costs less to the payor, the payor could afford to pay more in alimony. The elimination of the alimony deduction beginning in 2019, reduces the overall dollars a family has to divide.
This TCJA’s repeal of the alimony tax deduction combined with the law’s temporary through 2025 repeal of dependency exemptions and increase in standard deduction will eliminate the need for divorcing couples to argue over who may claim a dependent child as a deduction in future years. However, it is possible that the new law’s treatment of spousal support will create a sense of urgency for couples, especially high-earning spouses, to expedite a divorce in 2018 and take advantage of the tax break under current law.
As the government works to develop guidance for applying the new tax law, couples considering a divorce should recognize that the entirety of the law is subject to modification and even repeal under a new presidential administration or a change in the congressional majority. As a result, it behooves taxpayers to consult with professional advisors to understand the law in its current state and address in divorce settlements any potential changes that may impact former spouses’ future income and tax liabilities.
About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and high-net-worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of the law and subsequent guidance issued by the Internal Revenue Service.
Among the many financial and emotional issues that couples will encounter on their road to a divorce are the implications that a final dissolution of marriage will have on their taxes. Following are some important tax-related issues for separated and divorcing couples to keep in mind.
Tax Filing Status
Legally separated and divorced couples have the option to file their individual tax returns as single taxpayers, or they may choose to file as heads of household when they have custody of minor children and are not married on the last day of the year. Couples whose divorces have not become finalized by the last day of the calendar year have the option to file a joint tax return as married filing jointly, or they may file two separate tax returns as a married couple, whichever will result in a lower tax burden. Often, this determination is best made under the guidance of an accountant, who can run the numbers for each filing status and determine which is more financially advantageous.
Estimated Tax Payments
Couples that make quarterly estimated tax payments during their marriage must determine which spouse will receive credit for those payments and any overpayments made in the year prior to a legal separation or divorce. While the credit will typically apply to the former spouse whose social security number is listed first on a prior year’s tax return, the IRS allows divorcing couples to come to an agreement to allocate estimated tax payments in any manner they choose. For example, a couple may agree to divide the payments equally, or they may choose to allow one individual to claim all of the payments, leaving the other individual with none. When agreement cannot be made, the IRS will typically divide the credit for prior year estimated tax payments proportion to each party’s separate tax liability. On a related note, taxpayers should remember that a divorce will ultimately change the amount of estimated taxes they will be required to pay each quarter.
Alimony and Child Support
The alimony an individual pays to a former spouse is tax deductible to the individual making the payments, as long as those payments are a requirement contained in a divorce decree or separation agreement. Any money given voluntary to a former spouse, outside of the final dissolution of marriage, is not deductible.
Alimony recipients must include those payments as a part of their taxable income on their annual tax returns. Under certain circumstances, it may be advantageous for recipients of spousal support to make estimated tax payments throughout the year or increase the amount of taxes withheld from their wages in order to avoid the possibility of a significant tax bill that alimony payments will create.
Name Change
Individuals who change their names after a divorce must notify the Social Security Administration (SSA) to ensure that the name on file with the SSA matches the name on their tax return. This can be accomplished by completing Form SS-5, Application for a Social Security Card, which can be found online at www.SSA.gov or by calling (800) 772-1213.
In addition, individuals who purchase health insurance through an Affordable Health Care Marketplace must report to the Marketplace any changes to their names or addresses. Should an individual lose health insurance due to a divorce, he or she must enroll in new coverage during the Special Enrollment Period. Obamacare requires all individuals to have coverage for every month of the year or risk exposure to an individual shared responsibility payment.
Investments and Financial Accounts
To ensure that one spouse does not remain responsible for the liabilities of the other spouse, it is recommended that divorcing couples close joint credit card and bank accounts. One a couple settles all of their marital debts, each spouse should then open new accounts in their own names. It is equally important that individuals update the named beneficiaries on all of their financial accounts, including retirement plans and insurance policies, to ensure that their assets will not be passed to an ex-spouse upon their death. Any contributions an individual makes to his or her Individual Retirement Account (IRA) before the issuance of a final divorce decree is tax deductible only to that individual; Contributions made to a former spouse’s IRA are not deductible.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.
Couples who separated or began the process of divorce during 2016 should remember that their marital status will affect their individual tax filings in April 2017. Following are some tax tips to keep in mind.
Name Change. Individuals who change their names after a divorce must notify the Social Security Administration (SSA) by completing Form SS-5, Application for a Social Security Card, which can be found online at www.SSA.gov or by calling (800) 772-1213
. It is important that the name on an individual’s tax return matches the name on file with the SSA to prevent any delays in the processing of the tax return and potential refund.
Alimony Paid. Individuals may deduct alimony paid to a spouse or former spouse under a divorce or separation agreement by entering the spouse’s Social Security Number or Individual Taxpayer ID Number on Form 1040. However, voluntary payments made to a former spouse outside of the divorce or separation agreement are not deductible. The same holds true for and property settlements, which are neither deductible nor taxable as income.
Alimony Received. Alimony is considered taxable income to the recipient. Because these payments are not subject to tax withholding, recipients may need to adjust the amount of taxes they pay throughout the year by either increasing the amount withheld from their wages or making estimated tax payments.
Child Support. Payments of child support are neither deductible by the payer nor taxable to the recipient.
Spousal IRA. If a divorce decree or maintenance is finalized before the end of the tax year, an individual may only deduct contributions made to their own individual retirement accounts; Contributions to a former spouse’s IRA are not deductible.
Filing Status. Married couples who separated but did not yet finalize a divorce during the calendar year have the option to file their 2016 tax returns jointly or as married filing separately. Once the divorce is final and filed with the court, neither party may file jointly for that or any subsequent tax year.
Health Care Law Considerations. Under the Affordable Care Act, individuals who purchase health insurance through a Marketplace must report any changes in their personal circumstances (i.e. name change, address change) to the Marketplace to ensure they receive the proper financial assistance to which they are entitled. Similarly, should an individual lose health insurance due to a divorce, he or she must enroll in new coverage during a Special Enrollment Period. Obamacare requires all individuals to have coverage for every month of the year or risk exposure to an individual shared responsibility payment.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.
For too long, women were socialized to believe that they were bad with money or that financial management was a role better left to their husbands. While women have come a long way, there remains a significant gender gap in financial literacy.
According to the results of a recent study conducted by the Global Financial Literacy Excellence Center at the George Washington University School of Business, women are less likely than men to provide correct answers to questions about basic financial concepts and more likely than men to admit that they do not know the answer to such questions. This lack of self-confidence in women’s abilities to manage money is alarming, especially considering that women outlive men.
Ninety percent of women will need to be self-reliant with financial decisions at some point in their lives, due to late-in-life marriage, divorce or widowhood. Rather than sitting on the sidelines, women of all ages should get in the game and start to take responsibility for their long-term financial success, now, before divorce or a spouse’s death results in financial surprise in the future. Here are some tips to get started:
- Be actively engaged in pursuing knowledge and building financial self-confidence.
- Ask questions and begin a conversation about personal finance by focusing on a topic on which you feel comfortable and to which you can relate easily.
- Be involved in financial decisions that affect you or your family.
- Pay yourself first by participating in an employer-sponsored retirement plan. Or, if you are self-employed or are a stay-at-home parent, create a retirement plan that you can contribute to for your future.
- Spend less than you earn.
- Build an emergency fund equal to three- to six-months of expenses.
- Set short- and long-term goals and develop an estate plan, including a will, which you can review regularly to ensure it continues to meet your needs and life circumstances.
- Seek the guidance of experienced financial advisors who you can trust to guide you through the process and help you make the decisions that are key to your long-term financial success.
About the Author: Kathleen Marteney, CRPC, is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. She can be reached at 800-737-8804 or via email at info@provwealth.com.
Provenance Wealth Advisors, 200 S. Biscayne Blvd., Miami FL 33131 (954)712-8888
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax and legal matters with the appropriate professionals. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
As wedding season approaches, it is a good time for couples to address the risks of financial infidelity.
Not all couples are financially compatible; one partner may spend or save money differently from the other. However, when a spouse intentionally hides assets or significant financial information from a partner, red flags should go up. Such unfaithfulness can be a sign of larger marital issues and as devastating to a marriage as sexual infidelity.
According to a recent survey conducted by Harris Interactive and the National Endowment for Financial Education, 42 percent of adults admitted to committing financial infidelity and more than 75 percent reported that such deceit negatively impacted their relationships. Moreover, the results of a recent survey conducted by credit reporting agency Experian revealed that 40 percent of newlyweds did not know their spouses credit score before walking down the aisle, despite the fact that 80 percent of respondents believed that financial responsibility is an important characteristics of a spouse.
While it is perfectly normal for a marrying couple to maintain separate bank accounts, both spouses should be forthright in sharing their financial information, including assets, earnings and debt. Doing so will go a long way to preserving the couple’s shared financial goals, which may include purchasing a house or savings for a child’s education or their own retirement.
Broaching financial topics may not easy. Following are eight tips to get the conversation started and keep couples financially faithful.
- Share everything, including credit scores, financial obligations, business interests, estate documents and spending habits. Transparency is key to cooperation and marital harmony.
- Work together to establish short-term and long-term financial goals and be prepared to compromise.
- Establish a budget based on current earnings and expenses with an eye on shared financial goals for the future.
- Set a dollar amount that each spouse will need to agree to before the other makes a big purchases. The amount could be as small as $100 or as large as $5,000 of more.
- Share account information so that one partner may access the other’s accounts in the event of an emergency.
- Look at the big picture. While a couple may have different spending habits, it does not mean their marriage is doomed.
- Consider the benefits of a prenuptial agreement before walking down the aisle.
- Seek the advice of a qualified financial advisor who can begin a dialogue about financial fidelity and guide a couple to help make the right decisions that meet their particular needs and goals.
About the Author: Stefan Pastor is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and he is a registered representative with Raymond James Financial Services. He can be reached at (954) 712-8888 or via email info@provwealth.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Provenance Wealth Advisors and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
