As President Joe Biden’s proposed tax plan and post-pandemic court backlogs complicate divorce decisions, clients need to use more care than ever with their taxes before splitting.
For many years, alimony was deductible for one party in a split and taxable for another. But under 2017 tax reform, starting in 2019 generally the giver can no longer deduct alimony from their taxes and the recipient no longer has to include alimony in their taxable income.
"If the payer cannot deduct the alimony, he or she may want to pay less to cover the tax deduction that is [no longer] available," said Jeffrey A. Schneider, enrolled agent at SFS Tax & Accounting Services Inc. and The Tax Relief Company in Stuart, Fla.
Future tax changes figure into contemporary divorce wrangling, too. “Delays in getting a court date could mean that the parties could be subject to higher capital gains tax rates next year,” said Cliff Capdevielle, managing attorney of Moskowitz LLP in Oakland, Calif. “Capital gains rates on assets sales during divorce could double, from 20% to 39.6%.”
“In divorce, non-working and lower wage spouses are concerned about taxation on their potential share of highly appreciated shares earned by the ... spouse via stock options or other company benefits,” said Pam Friedman, managing director and principal at Robertson Stephens Wealth Management. “Shares in an individual company, especially many volatile technology companies, can be risky to hold beyond the divorce, [but] selling those shares may generate a large tax expense.”
Such balance “is particularly difficult while the divorce is pending,” Friedman said, referring to court backlogs.
Property, transactional and transfer taxes should be reviewed in divorce, she added, as should such other expenses as deferred maintenance on the home or realtor fees. “One often-missed tax benefit on the couple’s tax return may be a net loss carryforward from the sale of assets during the marriage,” Friedman said.
“Best to sell assets now before that capital gains tax rate change,” Capdevielle said. “Sell the family home while married and take advantage of the $500,000 exemption instead of the reduced exemption of $250,000 after divorce.”
One advisor said the impact of tax changes will be limited.
“With regards to the proposed tax changes by the Biden administration, we don’t feel there’ll be much of an impact since the increased rates would only affect those with $1 million or more of income,” said Carol Petrov, vice president of Kendall Capital, Rockville, Md.