Your divorce changes your life in many ways: legally, socially, emotionally, and financially. Some of those financial changes are obvious. You divide property with your spouse. You may pay or receive child support or alimony. These things, in and of themselves, have a financial impact on you. But one thing you must be aware of, as you and your attorney are negotiating the terms of your divorce, are how these changes will affect your tax status. Let's unpack some of the tax implications of divorce in Florida.
Alimony and Your Taxes
The 2017 Tax Cuts and Jobs Act affected divorcing couples in a number of ways they may not have expected. The most significant of these was in the area of alimony, also known as spousal support. For decades, alimony paid to an ex-spouse was deductible from the payer's taxes. The recipient also had to report alimony received as income on his or her taxes. The TCJA has changed this fundamental "fact" about alimony which many people had taken for granted.
For divorces finalized before December 31, 2018, alimony received pre-TCJA tax treatment. For those finalized in 2019 and thereafter, alimony will no longer be deductible to the payer or taxable as income to the recipient. Let's take a look at how this difference plays out.
John and Mary are divorcing. John has taxable income of $100,000 per year, and Mary has $30,000. In their divorce settlement, they agree that John will pay Mary $24,000 per year in spousal support. Ignoring other deductions, if their divorce is final in 2018, John's taxable income will be $76,000, and Mary's will be $54,000. If their divorce is final in 2019, even after the alimony payment, John's taxable income will remain $100,000 and Mary's, $30,000.
How might this affect you? With the change in the law, if you were hoping to receive spousal support, your spouse might be less inclined to agree to it, or might not be as generous. If you are going to have to pay spousal support, be aware that you won't get the tax deduction you might have been counting on.
Tax Implications of Custody
The TCJA also eliminated personal exemptions for tax years 2018 through 2025. Each exemption you claimed allowed you to exempt over $4000 in income from being considered taxable. Where it was once worth a significant amount to have the right to claim your children as dependents on your income tax return because of their personal exemptions, that incentive is now gone, at least temporarily.
There are still some incentives to claim your children as dependents on your income tax return, though. Certain tax credits are available under the TCJA to parents who claim the children on their tax return. In Florida, the parent with physical custody is entitled to claim the children as dependents. However, the parent entitled to claim the children may release this right to the other parent on an annual basis. You and your spouse might negotiate about who gets to claim the children, depending on which of you would receive the most benefit.
Tax Implications of Property Division
Florida is an equitable distribution state, meaning that all marital property needs to be divided between divorcing spouses in a way that is fair under all the circumstances. That said, not all property is created equal. Claiming some items in your property division could create a tax advantage, or cause you to take a hit come tax time.
Let's consider the marital home. If you and your spouse own a house together, chances are you have a mortgage, and are paying mortgage interest. During your marriage, you both benefited from the ability to deduct mortgage interest on your income tax. It makes sense for the person who takes the marital home (and presumably the mortgage) to have that deduction after divorce. Be aware, though, that the new tax law has reduced the deductibility of mortgage interest as well as the amount of mortgage that is eligible for deduction. So getting the marital home in a property settlement may be a somewhat bigger burden, financially speaking, than it was previously.
Some tax considerations in divorce have nothing to do with changes in tax law. Transferring certain non-liquid assets between spouses as part of a divorce may have tax consequences or penalties. These include:
- 401(k)s and 403(b)s
- Thrift savings plans
- Individual retirement accounts (IRAs)
- Brokerage funds
- Certain annuities
- Stock options
The tax implications of property division in a Florida divorce may not be obvious up front. You and your spouse may have a million dollars in assets and agree to divide those equally, but if you are not aware of the likely tax consequences, one of you could wind up with a windfall and the other a burden. Even if your marital estate is more modest, not knowing the tax impact of your property division can impact you negatively.
Preparing for the Tax Implications of Divorce
You cannot adequately prepare for the tax implications of divorce unless you understand what they are likely to be. As with any complex aspect of divorce, it is best to have the advice of an attorney who is experienced in Florida divorce matters, particularly in high net worth divorce. If you have questions about the likely tax implications of your divorce in Florida, we invite you to contact the Florida Divorce Law Group; we are ready to help you and we will use all of our experience to get you the results you are looking for.