Breaking Up is Hard to Do: 3 Tax Strategies that Make Divorce Settlements Easier

When you strip away the emotions that often surround it, many divorce proceedings come down to numbers. It may sound harsh, especially if you have children to think about, but it’s true that the numbers matter: from the amount of alimony, to the amount of child support and dividing up assets.

This is why divorce settlements are never easy. As any divorce lawyer in Suffolk County can tell you, the overhaul of tax rules has changed the computations for divorce settlements. Apart from determining who gets what, there are numerous tax implications that come with divorce, especially with the new modifications to the tax laws. If you’re going through a divorce, this means it’s time to do some serious tax planning so you won’t suffer the consequences of the new laws.

Selling the Primary Family Home

Though you’re not immediately taxed if you’re the one who keeps the house (depending upon whether or not you buy out your spouses interest), you might incur taxes down the road. The new law reduced the deductibility of property taxes, as well as the amount of mortgage you need to qualify for interest deductions. This means that owning a home under the new tax laws is more expensive.

Meanwhile, if you sell your home after buying out your spouse, you can exclude up to $250,000 of the capital gains—the selling price of your home minus the selling expenses and basis—without tax due. If you sell the home jointly with your ex-spouse, you can exclude up to $500,000 from tax.

Trading Assets Wisely

Spouses who are in the middle of settlements may sometimes “trade” assets. This means giving up their part of a larger joint asset in exchange for another. For example, your spouse may transfer their share of the house to you in exchange for a portion of your retirement assets. This move, however, isn’t a sound financial decision.

Instead, you should determine the value of your assets by the expected taxes due when these assets are sold. One of you can provide cash to equalize the after-tax value of the asset settlement, which is good for your taxes because equalization payments are not taxable.

Negotiating the Value of Your Children

Before the Tax Cuts and Jobs Act rolled out, each of your dependents could give you $4,050 in tax exemption. Although tax exemption has been eliminated, it’s important to negotiate who will claim the children. If you’re the parent who gets the dependents, you may be qualified for child tax credit, which has increased to $2,000, double its original amount.

What’s more, if the dependent is spending more time with the parent with less income, they might be eligible for financial aid. If your kids are young and you’re the one who claims them as your dependents, you might even see an increase in benefits in the future since the tax exemption is scheduled to go back to $4,000 per dependent.

Maintaining healthy family dynamics is important in every divorce, but it’s never easy. The new tax laws added another layer of complexity to this already confusing event. Because of this, you should educate yourself on laws and tax codes that could impact your financial health after divorce.

The Law Offices of Ian S. Mednick not only offers legal representation to clients who are considering filing for divorce in New York, but we also help you understand the implications of the settlements.

Contact us today to schedule an appointment. Ian, let me know of any edits or good to publish.