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Are Divorce Fees Tax Deductible?

Are Divorce Fees Tax Deductible

Usually divorce legal fees aren’t.  You should talk to your accountant to determine if you have the ability to legally deduct divorce costs and fees from your taxes. Congress has recently passed the a significant tax reform and many people are wondering how it will affect them. Much attention has been paid to what deductions will be available to taxpayers, but some deductions haven’t received much attention in the press. In the end, changes to one such deduction may have a big impact on many Utah families: whether alimony paid is deductible from the payer’s income, and taxable as income to the recipient.

Current tax treatment of alimony

Alimony is awarded based on the recipient’s need and the payer’s ability to pay in Utah. Unlike child support there is no fixed formula for deciding alimony, and couples can agree on an alimony amount they consider to be reasonable, or the court can determine it when necessary.

Under current tax law, alimony payments are deductible to the payer and taxable as income to the recipient. We can use the example of a couple. Let’s say that Joseph earns $80,000 per year and Mary earns $20,000. They divorce, and Joseph is ordered to pay Mary $12,000 per year in alimony. Putting aside other deductions either of them might take, Joseph’s taxable income is now $68,000 while Mary’s is $32,000.

This, obviously, takes some of the sting out of having to pay alimony. With the new law, this deduction is going to be eliminated though not immediately. That means that if you have a plan to divorce, you have the chance to keep this deduction, that is if you are able to have a divorce decree entered in time.

How tax reforms affect alimony

Under the new tax law, alimony will not be deductible from income by the payer, nor will alimony payments count toward taxable income for the recipient. In the above example, even though Joseph is paying Mary $12,000 in alimony per year, Joseph’ taxable income will remain at $80,000, and Mary’s at $20,000.

However, this only applies to those divorce orders that are entered or signed by the judge after December 31, 2018. Therefore, if Joseph and Mary have their divorce decree entered on December 30, 2018,  the old tax law applies. If the decree isn’t entered until January 1, 2019, Joseph will lose the tax deduction for alimony payments he will pay more in income tax, and Mary will pay less.

What About Modifying Alimony?

Obviously, if you are in Joseph’s  position, it is in your best interests to have that divorce ruling entered in 2018. You may even be inclined to be generous in agreeing to an alimony amount in order to “seal the deal” and get your spouse to agree to a divorce settlement. After all, you can always go back to court later and have the amount of alimony modified downward if you need to. Is this true?

Yes it may be the case and no, it may not be the case. Utah divorce law does provide for the ability to modify an alimony award under certain circumstances, such as if the payer loses a job or becomes too ill to work and it is permanent in nature. As a general rule, though, the court will not reduce the amount of alimony unless good cause to do so is shown, or unless the ex- partners specifically agree. Even if you can get the judge to sign off on an alimony reduction, however, another risk awaits.

For the people who sought and receive a reduction in alimony payments after December 31, 2018, the new tax laws will apply, even if the original divorce decree was entered in 2018 or earlier. So let’s say Joseph, with an $80,000 income, agrees to pay Mary, with a $20,000 income, $12,000 in alimony each year. The divorce decree is entered in 2018, so Joseph’s  taxable income is $68,000 and Mary’s is $32,000. Then Joseph loses his job, and can only find a new job paying $60,000 per year. Meanwhile, Mary has gotten a better job and is earning $30,000 per year. Joseph decides to ask for a modification of alimony.

The judge agrees that Joseph’s ability to pay and Mary’s need have both changed, such that a reduction in alimony is appropriate. In 2019, alimony is reduced to $6,000 from $12,000. But now, since the new tax law applies, Joseph  no longer gets to deduct that $6,000 from income. Joseph’s taxable income is now $60,000. On the other side, Mary no longer has to claim the alimony as taxable income, so Mary’s taxable income remains $30,000. In reality, however, Joseph only has $54,000 after paying alimony, and Mary has $36,000 after receiving it.

Conclusion: The change in tax law may make individuals who received favorable treatment under the old law think twice about pursuing a modification under the new law, particularly if the modification is likely to be small. The loss of the tax deduction might counteract the benefit of the reduction in payment.

Is the child tax credit affected by the new law?

The Child Tax Credit is now twice the original amount, that is, from $1,000 to $2,000. $1,400 of that amount is refundable, which means that if the credit reduces your tax bill to zero, you can receive the remaining amount of the refundable portion as a tax refund. In addition to this, the credit doesn’t even begin to phase out until income reaches $200,000 for a single taxpayer or $400,000 for a married couple. That means people who didn’t meet the requirements for the credit in the past will now qualify.

All of this sounds great, but the benefit will be limited to majority of the people who need it the most. The refundable tax credit doesn’t kick in until a family earns at least $2,500 in income, so families with very little earned income won’t really see a benefit. The law also makes other changes that may offset the increased child tax credit, so that the benefit is not as great as it appears.

Tax Implications Of Divorce

When divorce occurs,the divorcees will document their individual tax return. There are however cases in which transactions which were done before divorce can cause negative outcomes in terms of tax. Some of these may include:

1. Maintenance of the child or children

When it comes to child maintenance or support, it cannot be deducted from the taxable income of the spouse who is paying it and is not also taxable to the partner receiving it. Any payment that is not designated by divorce agreement as payment to support the children, cannot be considered to be child support. If payment is reduced due to occurrence of a child related contingency, it can also be considered as child support.

2. Agreement On Property

Settlements on property cannot be taxed when it comes to couples separating. When couples transfer property between them, there are no taxes involved. In short, no deductions are made on the income due to this. The original value of the assets required for taxation purposes apply when the property reaches when the property reaches the house of the spouse receiving them.

It is good to be careful since your ex may give you property having the same measure based on the price in which the property would exchange hands but with a lower price compared to the original price which could result to higher taxable gain during the sale of the asset.

Here Is What Happens When Retirement Plans Are Divided Up In A Divorce

When the retirement plans are divided, there is no taxation if it is in accordance  to a qualified family law order or any other court order in the case of an Insurance Regulatory Authority. This is only applicable if assets remain in a retirement account. Once the money is shared, the partner who receives it will be taxed. During division, no taxation occurs on both the payer and the recipient.

Preparing Financially For Divorce

Incase you want to divorce, it is good to have a financial plan after the divorce. This is to mean that you should divide all what you gathered together during your marriage. You should actually make a record of the financial situation of both of you which is good since:

  1. You will get prior information for an ultimate division of assets and liabilities.
  2. It will assist you to make a plan on how you will clear the debts you have in the marriage.The best thing before divorcing is actually clearing all debts that you have. The debts may be of credit cards which in most cases people split up without clearing. This may lower the credit score. It is therefore good to discuss and agree on how to clear the debts that you have jointly. Each spouse will take care of his or her individual debt.

Handling Of Credit Cards After Divorce

After a divorce the divorcees are usually advised to cancel all joint accounts immediately. Cancelling the accounts is actually more appropriate before divorcing since it may save you a lot of trouble. The disadvantage of retaining the joint account is that you will be responsible for the bills since your name still exists on the account.

In addition to this it is good to realize that there is no specification on who should clear the debt. It can either be you or your ex spouse. The creditor will demand payment of the bill from whoever he thinks may be able to clear the debt. If the bill is not paid on time both your name and your ex’s will be reported to the credit bureaus.

This can lower your credit score since your credit history will be damaged. It is therefore good if you clear the outstanding amount especially if your ex-spouse is slow in paying then follow up on your money from him or her later. Another option may be transfer of the balance to separate accounts so that both of you may be responsible.

Four Tax Deductions That Are Not Taken Into Consideration

Tax On State Sales

In case you live in a state that does not have income tax, this is a great write-off to take advantage of. You can either deduct state and local sales taxes or state and local income taxes.

For most families in this situation, deducting income tax is the better option. How much you can deduct will depend on the state you live in and your income level. If you purchased a car, washing machine, etc, you can deduct the sales tax, up to the limit of the state’s general sales tax rate.

Tax On Medical Expenses

If you or a member of your family has had major medical expenses over the past year, these expenses can be used to reduce your tax burden. It is good to know that you can only deduct medical expenses if they amount to more than 10 percent of your family’s adjusted gross income.

For most families, this means the medical costs would have to be fairly significant, but if someone lost their job or got a dramatic pay decrease, it is much easier for medical expenses to reach the 10 percent requirement. To make the most of claiming these expenses, ensure you pay any medical bills before the first of January, so they count toward the year’s taxes.

Earned Income Tax Credit

Many lower-income families qualify for the Earned Income Tax Credit , but according to the IRS, 25 percent of taxpayers who are eligible don’t claim it. Some aren’t aware of it while others fail to take advantage of the EITC because the rules are complicated.

The EITC isn’t a deduction but a refundable tax credit designed to supplement lower-income workers. The tax credit doesn’t only apply to low-income workers. It also includes families that have suffered recent financial hardship such as losing a job, getting a pay cut or losing hours at work.

How much you receive will depend on your income, family size and marital status.

Tax and legal expenses

The Internal Revenue Service considers expenses that are necessary for the regular operation of your business to be tax deductible. This includes any fees paid to your lawyers, consultants or accountants during the tax year.The only exception is legal fees paid in order to acquire business assets.

Several other similar areas are also tax deductible, such as fees paid for tax preparation the previous year, licensing or regulatory fees paid to the government, and expenses related to the education and training of employees.

Divorce Lawyer Free Consultation

When you need legal help for a Divorce in Utah, please call Ascent Law at (801) 676-5506. We will help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506