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How the new tax law affects divorcing couples

With the tax filing deadline upon us, many couples have taxes on their agenda, if they have not filed them already. For families in the midst of a divorce, tax season can present unique challenges.

One such challenge is the passage of the federal tax overhaul in December of last year. Many people are still unsure of how these changes will affect their tax returns, but the new regulations will have a significant impact on those considering divorce. Here is how.

No more alimony deductions

Tax deductions for spousal maintenance (more commonly known as alimony) have long been incentives for couples going through divorce. Under the old tax code, individuals who paid alimony to a less financially secure ex-spouse were able to deduct those payments from their taxes each year. Similarly, those who received alimony had to declare the payments as income.

Under the new regulations — which apply to any divorces after December 31, 2018 — these requirements go away. On the one hand, this seems convenient for both parties. Neither party will need to keep the IRS involved in their finances following divorce.

On the other hand, it could lead to more contested divorces. Several family law commentators note that alimony tax deductions often incentivized the higher paid spouse to consider spousal maintenance because the deductions offset its overall cost. Without those incentives, alimony payments might be lower or not considered at all, which could lead to fewer settlements and more divorce litigation.

Changes to child tax credits

The new tax law also changes child tax credits, which could affect how parents determine who claims the children on their tax returns following divorce. Under the new regulations, parents can claim $2,000 per child who qualifies as a dependent. This doubles the current credit, which was $1,000 under the old law.

However, this updated credit phases out as the incomes of parents increase. If you make more than $200,000 as a single parent, then your tax credit is reduced by $50 for each $1,000 made over the limit. Eventually, it is possible that you would not be able to claim any child tax credits as your income climbs.

State vs. federal changes

At this point, these changes only affect federal tax returns. As you may have heard recently in local news, the Minnesota legislature is still considering how to amend the state’s tax policies to conform to these new regulations. Like a handful of other states, Minnesota uses your federal tax return to calculate your state tax return each year. Therefore, changes in the state tax code will be necessary to prevent ballooning costs for Minnesota taxpayers next year.

Taxes are complicated enough without the added stress of divorce. Therefore, it is often helpful to include your lawyer in any discussions about how to handles taxes while in the midst of divorce. He or she can help you understand what is at stake, how best to navigate this tax season, and how to plan for future tax seasons as these changes take effect.