Divorce and Taxes: What You Need To Know
Taxes touch every aspect of a divorce case yet is an often overlooked issue by many parties.
Mike O’Shea is Partner and Co-Founder of Family Law Partners, a Chesterfield-based firm that exclusively practices family law, and he joined the STL Tax Lawyer Mark Milton to discuss the tax consequences every person facing divorce should keep in mind.
Most divorce cases face four general issues that all have tax liability possibilities: child custody, child support, spousal maintenance (also known as alimony), and division of property.
A good St. Louis divorce lawyer can structure settlements that collectively give the parties the best financial position from a tax liability perspective.
Following the Tax Cuts & Jobs Act of 2017, effective for divorce and separation agreements made after Dec. 31, 2018, maintenance is no longer tax deductible for the payer and is not taxable income for the recipient.
Child support is also not considered taxable income and is determined by a formula called Form 14 in Missouri.
In some instances post-divorce, a person may unsuspectingly receive an IRS notice about a joint tax liability that was unknown, which is why it’s important for clients when going through a divorce to be thorough in relaying potential tax liabilities to their divorce attorney and being transparent about their finances, according to O’Shea.
“Attorneys should draft ‘catch all’ provisions in separation agreements that anticipate the situation of after discovered debt and property and how to divide it,” O’Shea said. “If you represent the spouse who wasn’t involved in the financials of the marriage, then you can structure an agreement that if there is some past due liability then either spouse has the ability to file a motion and argue that the debt should be disproportionately divided.”
However, the IRS is not bound by a divorce decree because any tax debts due to a couple that filed jointly allows the IRS to go after both or either party.
“The IRS will get that money owed however they can,” Milton said. “They’ll take the low-hanging fruit and that’s the difference between joint liability and individual liability, so if you’re having trouble with your marriage my advice to you is file your tax returns separately because otherwise you will be on the hook for joint liability.”
One option to fight that liability is to argue for Innocent Spouse Relief, which is a difficult argument to make since you must provide convincing evidence to the IRS that you had no knowledge of what is going on with your spouse or ex-spouse’s finances, according to Milton.
O’Shea advises divorce clients to also consult with a St. Louis tax attorney to see if an adjustment to the tax withholdings on their W-4 is appropriate.
“Most people file taxes ‘married, filing jointly’ when they’re married, but the first year after your divorce you’re going to be likely filing single especially if you’re the higher income earner who can’t claim the kids or use head of household status,” O’Shea said. “ So you may need to adjust your W-4 to make sure you are withholding enough because most people are very surprised to see their taxes are so high when they go from ‘married, filing jointly’ to ‘single.’”
For more information on divorce and taxes, click here to listen to the STL Tax Lawyer podcast.