Recent changes to the tax code created potentially devastating tax consequences if a high asset divorce is not handled properly. Where large, valuable assets are concerned, the Republican tax overhaul that took place this year made some significant changes. So much so that attorneys and financial advisors are now recommending that personal accountants become a strategic part of the divorce process.
The chief wealth strategist at Wilmington Trust offers four potential strategies for couples to lessen the tax burdens after divorce. First, move alimony into a trust. Beginning with 2019, spouses may no longer deduct alimony payments as a business expense. This eliminated a substantial tax break for many paying spouses. The reason for this change was that while those ordered to pay alimony had been able to take the tax break, those who received it were not required to report it as income. Therefore, the IRS has had to make up for that shortfall since the tax code of 1942, and the offer of alimony was used by parties as a way to entice settlement negotiations.
Second, sell the high-value family home. Filers may no longer take large property tax deductions. This means that whomever wishes to keep the home may see an increase in their tax bill by 25 percent or more. On high-value real estate, property taxes can be $25,000 or more. If unable to take that amount as a tax deduction, the owner is going to show significantly more income, and thereby owe significantly more taxes. This means that spouses who, in the past, would have wanted to keep the marital home to raise the children in, would be unable to afford to remain in it.
Third, consider the value of dependents in terms of exemptions, child-tax credits and the need for student financial assistance for college. All of these factor into, or out of, a custodial parent’s income. Finally, work with an accountant to look at the differences in filing your taxes different ways. In other words, practice filing. This will allow you to see how the tax overhaul will affect you after the divorce.