Divorce 2019: What You Need to Know about the New Tax Laws

The holidays are over, and many Bay Area couples will begin working through the details of their Divorces. January historically has the highest number of Divorce filings. The paperwork, parenting plansand division of assets never get any easier. And this year, the changes from the GOP tax plan could add another layer of stress.

Here’s what you need to know if you and your spouse will be divorcing in 2019 or beyond:

1. Changes in alimony payments 

We’ve talked about this in previous articles. Alimony paid will no longer be tax-deductible and alimony received will no longer be taxable income. The results? This could make the divorce process more acrimonious and emotional. High-income divorcing spouses will fight aggressively to pay less alimony because the government will no longer subsidize these payments via the tax deduction. Many worry that this will penalize women, whose income typically falls sharply after a divorce. Lower-income spouses will likely fight to get as much alimony as possible, since the tax burden will be removed and the payments will go further.

2. Modifications to Divorce agreements: People who are already divorced will be grandfathered in

If divorced couples’ Divorce agreements are modified in 2019 or beyond, they could be subject to the new rules as well. If the modification states that it is to be governed by the new rules, then the new rules will apply. If the modification says nothing, however, the old rules will apply. The bottom line: People should be extremely cautious when modifying Divorce agreements in 2019 and beyond.

3. Children are no longer the tax deduction they used to be

The 2017 tax law eliminated the $4,050 exemption for each dependent, through 2025. The child tax credit, however, has doubled from $1,000 to $2,000. Remember, too, that the standard deduction has almost doubled because of the 2017 tax law. Single taxpayers in 2019 will see a standard deduction of $12,000; it was $6,350 in 2017.

4. Pre- and post-nuptial agreements may be affected by the tax changes

The new rules may nullify many of the items in such agreements, so all pre- and post-nuptial agreements should be reviewed by a financial consultant or legal specialist.

Additional tax strategies if Divorce is part of your 2019 plans

• Consider alternative investment/tax strategies. If you are the higher-income spouse, consider giving an Individual Retirement Account (IRA) to the lower income spouse, if applicable, because that shifts the tax burden to the receiver when that IRA is accessed. If you’re the lower-income spouse, you would inherit that burden when you cash out your IRA. Both parties should carefully consider their total tax equations and find the most comprehensive way to benefit financially over the short- and long-term.
• Tax-deferred strategies. Financial planners say some spouses may choose to forgo alimony payments and explore alternativessuch as lucrative real estate, larger shares in tax-deferred retirement accounts or some complex combination of the two that maximizes tax advantages. Options include a Qualified Domestic Relations Order (QDRO) that sets up future payments to a lower-earning spouse from a higher-earning spouse’s retirement account, taxed at the lower earner’s rate.
• Wait for your advisers to get up to speed on new laws and trends.This isn’t a contest; you don’t have to be the first couple to file for divorce in the new year. Your financial adviser will discover patterns and trends and be better prepared to advise you on financial issues if you wait a few months. Let someone else be the guinea pig!
• The benefits of cashing out. You might consider taking (or giving) a lump-sum Divorce payment instead of monthly payouts. This provides the opportunity to invest, pay for home repairs, or simply the ability to move on quickly and have a fresh start.

If your Divorce is uncontested, we can assist you and help you save a significant amount of money. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.

A 2019 Tax Break for Small Business Owners

Small business owners may be looking forward to a tax break in the new year. The GOP tax plan was hastily engineered and rolled out to benefit big corporations--not small business owners. Now a 20% deduction is available to entrepreneurs—but there are limits. You may qualify for the break if your taxable income is below $157,500 if single, or $315,000 if married.

Becoming an LLC may come with additional requirements

Many of our clients over the last few years have upgraded their business status to an LLC or other corporate structure. The reasons are simple— it separates the business from its owners. A corporation acts like a completely separate body that can do things like buy and sell property, be taxed and enter into contracts. Most importantly, it protects its owners from personal liability for corporate debts and obligations. LLCs are very popular right now, and an LLC can save you money on taxes, but there’s a caveat.

Here are some things to think about if you’re considering an LLC:

1. An LLC isn’t a free-for-all

The new tax law's 20% deduction on qualified business income is subject to limitations that keep it from being a free-for-all for every entrepreneur. In general, to qualify for the full deduction, your taxable income must be below $157,500 if you're single or $315,000 if you're married and file jointly.

2. If income exceeds these thresholds, you may not qualify for the deduction

Entrepreneurs with potentially high-earning service businesses, such as doctors, lawyers, CPAs and financial advisors—those positioned to make a lot of money--may not be able to take advantage of the deduction because their incomes exceed the limits.

3. Your spouse’s income: Another caveat that may further limit the potential deduction 

Partners in a business may find themselves in another situation in which one owner gets the 20% deduction and the other doesn't. While partners may qualify, if they have a high-income spouse, they may wind up exceeding the taxable income threshold. In this case you can have two people doing the same work for the same pay, but only one can take the deduction on his/her return because of other factors.
An LLC protects owners from having their personal assets seized by the business' creditors. For many entrepreneurs and small business owners, an LLC remains the best choice for an upgrade to a sole proprietorship. With the new tax laws, an LLC now provides additional benefits.

Are you planning to upgrade your business status to a corporation in the new year?

Make an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.

Trump, Taxes and Divorce: End of the Alimony Deduction

While many of the changes to the GOP Tax Cuts and Jobs Act are geared toward corporations, big businesses and those who own them, a repeal of a deduction for alimony is an example of how the tax law will have consequences beyond the one percent.

In some cases, the new law will be turning over tax policy that has been in place for decades. Given the highly partisan and controversial manner in which this bill was passed, it leaves many wondering if Republican legislators thought through the consequences for those who are likely to be most affected—in most cases women.

Current law has included an alimony payment deduction for 76 years

According to the Act as it is currently written, this deduction will be eliminated, effective 2019. Couples who are in mediation, separated or contemplating Divorce are being counseled to act now if it seems that Divorce is the inevitable outcome. A result of the new law could be a surge in Divorces.

“Now’s not the time to wait,” said one Philadelphia lawyer and former chair of the American Bar Association’s section on family law. “If you’re going to get a Divorce, get it now.”

The deduction substantially reduces the amount of alimony payments

What does the deduction mean for divorcing couples? For those in the highest income-tax bracket, it means that every dollar someone pays to support a former spouse is actually costing him/her a little more than 60 cents. Potential divorcees have all of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses.

An increase in acrimonious Divorces that disproportionately target women

Many believe that removing this deduction will make Divorces more acrimonious, that people won’t be willing to pay as much alimony. More couples will end up fighting in court because they won’t be able to agree on alimony terms. Since it is women who tend to earn less and are most often the recipients of alimony, many believe this tax change could disproportionately hurt women. One family law attorney believes that the repeal reduces the bargaining power of vulnerable spouses, mostly women, in achieving financial stability after a Divorce.

Tax break: An overview

1. A burden on the IRS. This alimony deduction has been criticized for being a burden on the IRS. There is a one-one relationship between what ex-spouses are paying and receiving. In 2010, there was a $2.3B gap in the reporting. If they don’t match, the IRS may be auditing two people who may already be feuding—a very difficult situation.
2. Alimony has been deductible since 1942 because lawmakers believed it was unfair to tax people on the alimony they paid when the money was not available for them to spend.
3. The deduction is significant for divorcing couples. Let’s say that John earns $250,000, which puts him in the 24% tax bracket. He agrees to pay $4,000 per month in alimony, but it really costs him about $3,000, with the deduction. Without the break, John may agree to pay only what would have been his after-tax amount, about $3,000.
4. Unfair to give divorcees a special break. House Republicans justified the repeal by suggesting that it was unfair to offer a special break to divorcees. The repeal prevents divorced couples from reducing income tax through a specific form of payments unavailable to married couples.
5. The tax change is projected to raise $6.9B over the next decade; it is one of the ways Republicans are trying to compensate for the huge deficit created by the tax cuts.

If you are contemplating Divorce, if it’s uncontested, we can assist you

California Document Preparers has assisted hundreds of couples with their Divorces. If you can agree on division of property and a parenting plan, we can save you considerable money. Our dedicated team is helpful, compassionate and affordable. Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment.