Divorce Law Updates for 2020
The Tax Cuts and Jobs Act was passed at the end of 2018 and included new tax rules that affected divorce proceedings, particularly regarding alimony payments and tax filing status.
Kimberly Nelson, CFA®, CDFA, is an Adviser at Coastal Bridge Advisors, one of the many excellent financial advisory firms on the Harness Wealth platform. She has been working with high net worth divorces in the Los Angeles area for more than 15 years. Coastal Bridge ranks amongst the top 4% of Registered Investment Advisers in the country as measured by assets under management (AUM), one of their many distinctions as a firm.
For all divorces filed on January 1, 2019 and onward, several new tax rules based on the Tax Cuts and Jobs Act (TCJA) passed at the end of 2018, now apply. Shared wisdom from friends or family who may have divorced a few years ago (while well-intentioned) may no longer be relevant.
Updates: Tax on Support
- For the Payor: Alimony payments are no longer tax-deductible.
- For Recipient: Alimony payments are no longer taxable income.
- Divorce agreements inked prior to 2019 are grandfathered in under old rules, thus still tax deductible to the payor and taxable to the recipient.
- Unlike some provisions of the TCJA, the rules pertaining to alimony are not set to expire and will remain in law unless changed by Congress in the future.
- Child support payments have never been tax deductible, and this did not change under the new law.
Updates: Tax Filing Status
- A major change in effect post 2018 under the TCJA is the elimination of special tax brackets for single parents with custody of children filing as head of household once taxable income reaches $51,800. Simply put, the parent filing as Head of Household and itemizing deductions will no longer receive preferential tax treatment on any excess earnings above $51,800.
- There is good news however – the standard deduction for the parent filing as head of household was raised from $12,000 to $18,000.
- Unlike the TCJA laws surrounding alimony, the tax bracket preference for head of household will reappear in 2026 and provide for additional tax savings to the parent filing as head of household.
During this emotional and often confusing time, couples should recognize that it is in both parties’ interest to know these various rules and work together accordingly to achieve the best possible arrangement. Consult experienced legal, financial, and tax advisers who have shepherded clients through these difficult issues. With the right planning, you can have the confidence of knowing that a complicated situation was dealt with in a way that made the most of your financial potential and will set you and your family up for future success.
- Timing Key Divorce Events for Tax Purposes
- Divorce Tax Opportunities and Risks: The Selling and Transferring of Property
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