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You are here: Home / Archives for Divorce and Tax Planning

Filing Taxes During Divorce: Joint or Separate Returns?

By Jonathan Fields, Esq.

Couples in the midst of divorce often face difficult decisions regarding taxes.  One of them is whether to file a tax return as “married filing jointly” or “married filing separately.”  This article briefly examines the factors to consider in making what could prove a critical choice during a divorce.

I.  Eligibility to File a Joint Return

First, the basics – a taxpayer’s marital status for the entire year is determined as of December 31.  A taxpayer who is married (or divorced) on that date is treated as if he or she were married (or single) all year long.  The IRS looks to state law to determine marital status.  So, in Massachusetts, after the court approves your agreement, there is a 90-day or 120-day waiting period until the divorce is final – for the IRS, that’s the date that counts.

II. Considerations in Filing a Joint Return

Assuming a divorcing taxpayer has the option to file jointly – there are several considerations.

      a.   Does it Lower your Tax Burden?

In most cases, the couple will have a lower overall tax burden if they file jointly rather than separately but this, of course, will vary case to case.  Filing separately generally becomes costlier overall as the disparity in incomes increase.  In any event, this decision should be made with input from a qualified accountant.

       b.  Alimony

A critical economic consideration concerns the deductibility of any alimony payments made during the tax year.  If a couple files a joint return, the IRS does not permit alimony paid to be deducted from a payor’s gross income.

       c.  Joint and Several Liability

The filing of a joint return subjects both filers to joint and several liability for all taxes, interest, and penalties due in connection with the return — regardless of each spouse’s share of the taxable income.  The IRS may attempt to collect all or any of the balance due from either spouse, even if your divorce agreement says otherwise.  A spouse who believes the other spouse has understated income may wish to file a separate return, even if it results in a higher tax liability – because a spouse filing a separate return is not responsible for the tax liabilities of the other spouse.

       d.  Amending Returns

Another consideration is the limited ability to amend a jointly filed return.  Once filed, a taxpayer cannot amend his/her filing status after the April 15th deadline.  Conversely, a separate return can be amended to a joint return at any time up to three years from the original April 15th deadline.

III.  Conclusion

Individuals going through a divorce must carefully consider the ramifications of their tax filing status.  The consequence of the wrong choice might be serious – making it critical to get input from an accountant and divorce attorney prior to filing.

Filed Under: Divorce, Divorce and Tax Planning

Child Tax Credit and Dependency Exemption: Will the New Law Affect You?

Article I wrote just published in Divorce Magazine….

———–

With the new Tax Cuts and Jobs Act of 2017 (TCJA), U.S. Congress made significant changes to the Child Tax Credit and dependency exemptions that will matter a lot to divorcing parents. The key takeaway: the Child Tax Credit follows whoever has the dependency exemption – so it still matters how the dependency exemption is allocated in divorce agreements. Further, to those who say that the TCJA eliminated the dependency exemption – this is not true.  It has been reduced to zero through 2025, but it has not been eliminated.

Child Tax Credit and Dependency Exemptions: Background

A little background first. The dependency exemption was $4,050 per “qualifying child” in 2017 – which meant that, to someone with a 35% effective tax rate, it was worth about $1,400. It was available to most taxpayers as it only began to phase out for single filers at adjusted gross incomes of $261,500.

Subject to a multiplicity of factors beyond the scope of this short article, the “qualifying child” was one who reached the age of majority according to the state in which the child is domiciled. Most states recognize 18 as the “age of majority” – which is the age at which state residents are legally considered adults. The age at which a minor child qualifies to become emancipated (meaning that the minor is no longer legally under their parents’ care, and that they will have all of the rights, responsibilities, and privileges of someone who has reached the age of majority) varies from state to state.

The primary custodial parent is entitled to claim the dependency exemption unless the parent agrees to release the exemption to the other parent by completing and filing Form 8332 with the IRS. Divorce agreements typically contain a provision as to how the dependency exemption is allocated.

The Child Tax Credit, as noted above, attached to whoever had the dependency exemption – and the TCJA doesn’t change this.  However, until TCJA, the Child Tax Credit ($1,000 per child in 2017) began to phase out for single filers at adjusted gross incomes of $75,000 – so many divorce lawyers who deal with higher net worth clients never really confronted it.

The Child Tax Credit is More Valuable Under the TCJA

The TCJA made the Child Tax Credit more valuable, doubling it to $2,000 per “qualifying child” and making it available to most taxpayers; it only begins to phase out for single filers at adjusted gross incomes of $200,000. And, unlike the dependency exemption, it’s a credit: that is, it applies dollar-for-dollar against any taxes owed. Even better, it’s a refundable credit of up to $1,400 per child. This means that if the amount of the credit is larger than the tax owed, then the taxpayer gets a cash refund for the difference (up to $1,400).

As with the dependency exemption, there are a host of factors beyond the scope here that define the “qualifying child.” For the most part, however, to be eligible for the Child Tax Credit, a child must be under 17 years old as of December 31 of the tax year in order for the Child Tax Credit to apply.

The bottom line: if you’re going through a divorce, make sure you and/or your lawyer have a good handle on how the new tax law has impacted this area. You don’t want to leave valuable dollars on the table.

Read article here.

Filed Under: Child Support, Divorce and Parenting, Divorce and Tax Planning

Attorney Jonathan Fields presents Boston Bar Association panel “The Impact of the Tax Cuts and Jobs Act on Family Law, Divorce and Estate Planning,”

Jonathan Fields presented on a panel at the Boston Bar Association on March 5, “The Impact of the Tax Cuts and Jobs Act on Family Law, Divorce and Estate Planning,” explaining to lawyers the new law regarding the deductibility and includability of alimony, the elimination of the dependency exemption and other changes that will affect divorcing couples.

https://www.bostonbar.org/membership/events/event-details?ID=26544

Filed Under: Divorce and Tax Planning, Family Law, Tax Law

Jonathan E. Fields quoted in Massachusetts Lawyers Weekly Article on ‘Divorce Subsidy’

Jonathan Fields, was quoted in Massachusetts Lawyers Weekly.

Local family law attorneys are hoping that the storm has passed. But forgive them if they don’t exhale completely. We are talking about Congress, after all.

The U.S. House of Representatives “got the divorce bar’s attention,” says Jonathan E. Fields. The Wellesley lawyer is referring to the House’s inclusion in its recent tax-reform proposal of a repeal of the so-called “divorce subsidy,” which currently allows a payor to deduct alimony payments from his taxes. While alimony is taxable income to the recipient, that recipient is generally in a lower tax bracket, allowing the two former partners to pay less tax combined than if they were still married.

Or, as Fields says, the current system “puts more cash in the post-divorce pot.”

In a subsequent Senate version of the tax-reform bill, however, the effort to end the divorce subsidy seems to have been abandoned, reports Lincoln practitioner Regina Snow Mandl.

Mandl was so alarmed by the House proposal that she sent out a client alert, highlighting what she considered a flaw in the House bill proponents’ logic.

“This proposal fails to recognize that two households are more expensive than one, and that there were good reasons for allowing the seeming disparity between married couples and those living apart due to divorce,” she wrote.

The House Ways and Means Committee cited fairness as a justification for the proposed change.
“The provision recognizes that spousal support should have the same tax treatment as within the context of a married couple, as well as the provision of child support,” read a portion of the committee’s summary of Section 1309 of the Tax Cuts and Jobs Act, H.R.1.

However, critics characterized the proposal as a thinly veiled money grab, one estimated to generate $8.3 billion in tax revenue over the next 10 years that could help pay for tax cuts elsewhere in the plan.
While some suggested there was also a “pro-family” agenda embodied in ending the divorce subsidy, Fields isn’t so sure, if for no other reason than there are plenty of divorced legislators who would stand to be negatively affected by the change.

In addition to the nature of the proposal, the attorneys were concerned about its timing. The House proposed making the change effective as early as Jan. 1, which Mandl says would have given state legislatures and courts no time to consider an adjustment to the various alimony formulas, such as those in the Massachusetts Alimony Reform Act.

Specifically, §53(b) of G.L.c. 208 provides that “the amount of alimony should generally not exceed the recipient’s need or 30 to 35 percent of the difference between the parties’ gross incomes established at the time of the order being issued.”

Fields says that an unintended — though somewhat predictable — consequence of the Alimony Reform Act passing in 2011 has been that many divorcing couples now tend to settle on an alimony figure of 32 or 33 percent of the difference between their incomes. Baked into the conclusion that such a figure is reasonable is the fact that alimony payments will be deductible.

If representing a payor, “I don’t want a 33-percent order if my client can’t take the deduction,” Fields says.

While Probate & Family Court judges would no doubt adjust to the new reality should it come to pass, Fields suggests a prudent practitioner may feel compelled to provide the court with a tax analysis to illustrate why a level of alimony payments that once made sense no longer does.

For now, at least, such considerations seem destined to remain theoretical, though repeal of the Affordable Care Act looked dead several times this summer, only to have Republican lawmakers attempt to resuscitate it repeatedly.

“I don’t take anything for granted anymore,” Fields says.

Filed Under: Divorce, Divorce and Tax Planning

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    The Boston metro family law, divorce and estate planning attorneys at the law firm of Fields and Dennis LLP are based in the Newton Wellesley area and serve the city of Newton: Auburndale, Chestnut Hill, Newton Centre, Newton Corner, Newton Upper Falls, Newton Lower Falls, Nonantum, Oak Hill, Waban and West Newton and town of Wellesley: Babson Park, Wellesley Hills, Wellesley Square Fields and Dennis also serves many clients in the Greater Boston and Massachusetts region including Ashland, Dover, Holliston, Medfield, Needham, Sherborn, Westwood, and all of Massachusetts. Attorney Jonathan Fields is a recognized authority on bitcoin and divorce

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