I’ve written about tax consequences in divorce before, but alas – the law has changed again! It happens, from time to time, which is part of why it’s so important to be sure of where you’re getting information when you search for it online. You need to make sure that you’re not blindly trusting nameless, faceless, dateless information that you find just any old place, even if it answers your question exactly.
If you were to read this blog that I wrote before about tax consequences, you might think you had your answer. But, if you look closely, you’ll see the date! Hey, that’s super old! And though it was accurate, up to date, and Virginia specific at the time, the rules are different now. It happens sometimes. Well, it happens a lot of times.
So, all that to say, be careful. And try to find the most up to date articles you can on the subjects that you’re looking for, and, when in doubt, talk directly to a licensed, experienced Virginia divorce and custody attorney. When we’re talking about tax consequences, obviously, there are consequences, so you’ll want to be sure that the decisions you make now, as you negotiate your separation agreement or litigated divorce, serve you well in the long run and limit future problems with the pesky IRS.
Tax Consequences and Spousal Support
The law has changed, and spousal support is no longer tax deductible. So, that’s definitely something to be aware of as you negotiate your spousal support. You may be able to make due with less support, because you won’t need to pay taxes on the amount of spousal support that you receive.
Good, right? Well, yes, it is – once your spousal support award is in place. But it may make negotiating spousal support a little more complicated, especially if your case was filed before July 1, 2020. On July 1, 2020, a new law will take place that mandates support for parties whose combined income is less than $10k per month to be established by the Fairfax guidelines. Cases filed before July 1, 2020 are not restricted by this new law.
If your case was filed before July 1, 2020, you’ll still have to negotiate support. And negotiations have been more challenging since spousal support payments are no longer tax deductible. That was really the only benefit to a husband for paying it, and the only incentive he might have had to settle out of court. In spousal support cases, the potential paying spouse has more money to drag out litigation and thwart the lesser earning spouse, so it’s a real concern. Will the courts enforce Fairfax guidelines before July 1, 2020, even on cases filed before the deadline? Who can say?
After July 1, 2020, these things will get easier, at least pendente lite – provided that your income is less than $10k per month.
If your combined income is less than $10k per month, you’ll have spousal support calculated pendente lite using Fairfax guidelines, so hopefully fewer of these cases will be litigated, meaning that costs to you will be less. You’ll receive the amount based on the formula, and you won’t pay taxes on it. Done and solved.
BUT, if your income is above $10k per month, we’re not really sure right this minute how it’ll all pan out in the future. (And, obviously, if it’s a spousal support case, there’s already a higher chance that at least one of you is a relatively high wage earner, right?) Chances are good that the Fairfax formula will still factor in, but there may be some alteration to the formula for these higher wage earners.
How much will I receive in spousal support under the Fairfax guideline?
We can run a calculation for you! There’s no reliable calculators available online, so the best way to determine your eligibility for support is by scheduling a consult. We can run through guidelines for you and talk about probable scenarios based on the amount of money you’re earning.
Child support and tax consequences
Child support remains unchanged – it is neither tax deductible to the party paying it, nor taxable to the party receiving it.
It’s based on a formula, too – and there’s not a whole lot of wiggle room there. You could agree to an upward deviation, but you will at a minimum receive the guideline amount of child support (unless you agree to waive or reserve child support for future determination).
A judge I was in front of recently said it best: “The question is not, after your bills are paid, how much you have left to pay child support, it’s after your child support is paid, how much do you have left to pay your bills?”
Child support is a primary consideration, and it’s designed to help parents meet the child’s best interests. Taking taxes out of that amount (which, let’s face it, is already not overly generous) would not serve a child’s best interests.
Who claims the kids on the taxes?
Usually, the agreement specifies who can claim the children. Sometimes, parties alternate years, or one claims one child and the other claims another.
Before you have an agreement, you’ll probably file your taxes together. You could choose to file married filing separately, but that will change your ability to deduct certain items and may make your taxes higher. It’s best to talk to a tax advisor before you make any big decisions about how you’ll file. If you do file together, you would likely split any tax refund or liability equally between the two of you.
Tax Consequences: The House
Typically, whoever pays the mortgage can claim the mortgage interest deduction – unless your agreement says otherwise. If you’re married filing jointly, you’ll just share the deduction. Again, you could choose to file married filing separately, but that’s worth discussing with a tax advisor first.
Taxes are complicated, but you’re not in it alone. There are lots of resources, from your attorney to your tax advisor, that can help make sure that you’re making the best decision for yourself and your family.
For more information, or to meet with a licensed Virginia divorce and custody attorney, give our office a call at 757-425-5200.