Two things most sane people seek to avoid are divorce and taxes. Unfortunately, when you’re going through a divorce, not paying attention to taxes can cost you thousands. That’s especially true with the tax law changes that went into effect in 2018 and 2019. Now more than ever, not understanding how taxes will affect your divorce can be a very expensive mistake.
Last week we looked at 5 issues to be aware of. This week, we'll look at 5 more.
6. 529 Plans
529 Plans are special tax-advantaged savings accounts that parents (or grandparents) could create to save money for children’s college educational expenses.
In the past, 529 Plans could only be used to fund “Qualified Higher Education Costs.” That’s IRS speak for college/university tuition and certain other college or university expenses.
Under the new tax laws, parents can take up to $10,000 per year out of a child’s 529 Plan and use it to pay for that child’s elementary or secondary school tuition. Now, if your kids are going to private school, you or your spouse could want to use the kids’ college money to pay for it. That will save you from having to pay the private school tuition yourselves.
It will also leave your kids with less money (or no money) to pay for college.
The bottom line is that deciding what to do with your kids’ 529 Plans is now one more thing you’ve got to negotiate in your divorce.
7. Moving Expenses
Before 2018, if you were moving because of a new job, you could deduct your moving expenses from your taxable income. Now, you can’t.
While paying for moving expenses may not be a huge issue in your divorce, the truth is moving costs money. Since there is probably no way you will ever get to deduct those moving expenses from your taxes, you might want to think harder now about how you will pay for those expenses when you divorce.
8. Mortgage Interest & HELOC Payments
The new tax law limits the mortgage interest deduction to interest paid on the first $750,000 of your loan. To be deductible, the loan must also be used to buy, build, or substantially improve the home that secures the loan. That applies to home equity loans and lines of credit, too.
In the past, if a divorcing couple had a home equity line of credit that wasn’t maxed out, they could draw on that loan in their divorce. They could then use that cash to pay for their divorce expenses. Or, they could use it to balance out their property settlement or pay moving expenses.
When they withdrew that money, they could deduct the interest they paid on it from their taxes.
Now, you can still draw on your home equity line of credit in your divorce. But, if you use the money to pay for anything besides home improvements, any interest you have to pay will not be tax-deductible.
9. State & Local Tax Payments
Before 2018, you could deduct the amount you paid in real estate taxes on your federal income taxes. You could also deduct what you paid in state income tax, sales tax and other state and local taxes.
From 2018 on, you can only deduct the first $10,000 you pay in state and local taxes, including income taxes, real estate taxes and sales taxes.
If you’re thinking of keeping your home when you divorce, you’ve got to figure out if you can afford it. Not being able to deduct the full amount of the property taxes you pay can potentially cost you more in income taxes. That increases your expenses and reduces your cash flow.
10. Medical Expenses
Before 2018, you could only deduct medical expenses that exceeded 10% of your adjusted gross income. Now, however, you can deduct medical expenses that exceed 7.5% of your income.
While that 7.5% threshold was supposed to go back up to $10,000 in 2019, it didn’t. So for now at least, you can still deduct medical expenses that exceed 7.5% of your income.
Of course, in order to be to deduct medical expenses at all, you have to be able to itemize your deductions. If you don’t, then you’ll lose this deduction too.
If you have a lot of medical expenses, and you are getting divorced, the lower-income threshold for deducting medical expenses can be good news. First, when you divorce you can no longer file taxes with your spouse. So, you will have less income to declare on your taxes. Since you can deduct expenses that exceed 7.5% of your income, that means you will likely get more deductions.