Divorce Contemplation

May 31, 2018

Divorce is rarely a happy subject to discuss, but here are some of our suggestions for talking about the financial consequences of it, with the intent of making things less complicated for both parties.

If you’re separated, separating, or going through the process of the divorce and still married, you may need to make a decision about what status to file under.  Your status at the end of the year is generally your filing status, and married filed jointly (MFJ) is almost always advantageous for certain tax credits.  However, if there is a substantial tax bill, both parties of a joint return are liable for that amount.

That means that IRS can pursue either partner for the whole amount, and if your former spouse disappears or if you’re the one that has ended up with the cash, you may end up paying the entire bill.  The only protection (after you’ve filed) is called the innocent spouse rule, but you have to prove that you suspected nothing wrong with your taxes and that you didn’t benefit from the unreported income, or that you were forced to sign the joint return. That’s a much higher bar than a normal defense.

You could also choose to file separately (MFS), but that may mean both of you paying more in taxes because certain tax credits and deductions don’t apply to people filing separately.  It might mean more protection if you suspect that your former spouse is going to do something idiotic.

In the past, alimony and child support were treated very differently: alimony was deducted from your adjusted gross income (AGI) and added to the recipient’s AGI, child support was not deducted from the payer’s AGI, but it wasn’t added to the recipient’s either.  If you are currently paying or receiving alimony, that won’t change.  However, for anyone ordered or who agrees to pay alimony on or after January 1, 2019 it will be treated like child support: you don’t deduct it or add it.  So if you’re reading this when it comes out, try to get your alimony agreements signed off before then, because it can be a big deal.

If you pay or receive child support and it contains a provision about who gets to claim the child as a dependent, that provision is now basically  moot for your federal taxes because exemptions are going away.  However, just remember that some states may have provisions that depend on your dependents, and so you may need to still know who can claim them and who can’t (check with an accountant or lawyer in your state to find out about where you live).

Another thing that you need to know: The year that you divorce, you can’t claim your former spouse as a dependent, even if you keep living with them. Granted, this is going to matter a lot less as exemptions go away this year.

Finally, if you’re not the one that usually deals with the taxes or the money in general and there is anything that you don’t understand about taxes and finances as you get divorced, you should get your own financial advisor, accountant, or other specialist to help you go through the provisions of your divorce agreement to make sure that everything is fair for you before sign.  Divorce settlements are very complicated and both parties are rarely that amicable with each other so it’s not unheard of for one spouse to try to stick it to the other one.  An independent expert can help you make sure that you aren’t in that kind of situation.