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Taxes: Another reason for strategic planning in divorce

| Oct 1, 2018 | Uncategorized

Divorce is fraught with emotion. When the spousal relationship dissolves, it can create stress and bring out the worst in some people. While it can seem cold to say so, it is important for the parties seeking a Connecticut divorce to approach the process rationally. After all, in the eyes of the law, what is occurring is the ending of a contract.

A large part of the emphasis in divorce centers on financial aspects. Financial planning that seeks to secure the stability of both spouses as they enter this new phase of life is important. And this is even more important when children are factored in.

In Connecticut, property division is based on the concept of equitable distribution of property. There can also be tax implications to consider across the spectrum of issues, from spousal support, child support and more.

The tax factor has increased significance as we approach the coming of 2019. Readers are surely aware of the enactment of the tax reform bill late last year. Some provisions don’t take effect until Jan. 1. One that has gotten significant news coverage in recent months is that which ends the so-called alimony subsidy. Spousal support payments will no longer be tax deductible to payers. Recipients, meanwhile, benefit from not having to report that support as income.

Children

Child support is not subject to taxes, but the new law does change child-related tax factors. For example, the traditional dependency exemption for a child is now gone. However, if you have qualifying dependent children, the claimable tax credit for each one doubles this year to $2,000, and as much as $1,400 of a credit is refundable.

The possible impact this might have in divorce has to do with which parent can claim the credit. Only one can and IRS rules say the right defaults to the parent who has custody of a child for more than six months of the year. As a matter of equity, this might indicate value in negotiating a divorce settlement that allows the parents to alternate claiming rights year to year.

Business

Another feature of the tax bill is an increased deduction on qualified business income for owners of so-called pass-through business entities. Most private businesses are set up under this model and the deduction could mean owners will realize increased cash flow. If business property is a feature of a divorce, it becomes subject to consideration for equitable division, and increased cash flow could support increasing the value of that business.

Considering the many financial elements in divorce, it becomes apparent that rational heads can provide for the most peaceful dissolution. And by working with a skilled attorney, spouses can have confidence that their financial best interests are being served.