Sorting out finances during a divorce always takes time and effort. The coronavirus pandemic has only made it more complex. A combination of the relatively new Tax Cuts and Jobs Act (TCJA) and the pandemic’s CARES Act has led to unique situations for those getting divorced in 2019 and 2020. If you have questions about how a divorce or separation will affect your tax liability, read on.
Filing Status
When paying your 2020 taxes, the specific date of your divorce is key to figuring out how to file. Your filing statues depends specifically on the legal status of your marriage on December 31st, 2019. If your divorce is finalized on the last day of the year, then you still count as unmarried for the entire previous year.
According to California law, legal separation agreements also follow these guidelines. If your separation agreement is finalized on New Year’s Eve, for tax purposes you are considered unmarried for all of 2019.
This is important for one major reason: some of the rules put in place by the TCJA apply only to divorces finalized in 2019 and later. The date your divorce or separation is finalized can lead to a major difference in your tax burden for the year.
CARES Act
The CARES Act has some interesting implications for high-income individuals, especially in the case of divorce settlements. Previously, the TCJA limited the amount individuals and couples could use to offset losses against other forms of income. Now, the CARES Act allows active losses to offset other forms of income without limit, including retroactively.
This makes certain assets much more valuable to claim in a divorce if you’re a high-income individual. Previously, assets that generated significant active loses were unattractive, because as a single individual only $250,000 of that loss could offset other income. Since the retroactive nature applies to losses that occurred in 2018 and 2019, these formerly-unattractive assets can now be used to reduce a tax burden significantly.
Tax Brackets
One major change to the tax code itself in 2020 is an adjustment to the tax bracket rates. The specific percentages for each bracket remain the same; however, the cutoffs for each bracket have been raised to account for inflation.
| 2019 Individual Income Tax Rates | Single-Taxable Income | Married Filing Jointly – Taxable Income | Head of Household – Taxable Income |
|---|---|---|---|
| 10 percent | 0 to $9,700 | 0 to $19,400 | 0 to $13,850 |
| 12 percent | $9,701 to $39,475 | $19,401 to $78,950 | $13,851 to $52,850 |
| 22 percent | $39,476 to $84,200 | $78,951 to $168,400 | $52,851 to $84,200 |
| 24 percent | $84,201 to $160,725 | $168,401 to $321,450 | $84,201 to $160,700 |
| 32 percent | $160,726 to $204,100 | $321,451 to $408,200 | $160,701 to $204,100 |
| 35 percent | $204,101 to $510,300 | $408,201 to $612,350 | $204,101 to $510,300 |
| 37 percent | $510,301 and up | $612,351 and up | $510,301 and up |
Depending on when your divorce or separation was finalized, you may fall into a significantly different tax bracket for 2019 than you did while married. Depending on your earnings in comparison to your former spouse, that could be good or bad.
If you earn significantly more than your former spouse, it’s likely that you will end up in a higher tax bracket. However, if you have primary custody of a child, you may still see tax benefits from a separation.
Having primary custody, qualifies you to file as Head of Household after a divorce or separation. That’s a simple way to pay slightly less in taxes for 2019. For example, if you make $84,200 (exactly the cutoff for the 22% tax bracket), you’d owe $14,382.50 as a single person. Filing as Head of Household, you’d only owe $12,962 on the same amount.
Deductions
The standard deduction for taxes paid this year have also been adjusted. To keep up with inflation, the deductible for 2019 taxes paid in 2020 has been raised to $12,200 for filing as unmarried or married filing separately, and $24,400 for married filing jointly. Meanwhile, filing as a head of household makes you eligible for a deduction of $18,350.
This is a significant increase from a few years ago. In 2017, prior to the first implementation of the TCJA, the standard deduction was a mere $6,350 for single people. This deduction will continue to rise for the year 2020, as well.
Alimony
The TCJA has made one major change for alimony in divorces finalized in 2019 and beyond. Most importantly, alimony is ignored. Alimony is no longer considered taxable income for the recipient. Similarly, alimony is no longer deductible for the person paying it.
The expected result is that alimony judgements will have decreased during 2019. New alimony decisions are supposed to take into account the fact that the high-income spouse is still paying taxes on those funds. If your divorce was finalized on January 1st, 2019, this still applies.
Furthermore, this new tax rule may apply to old divorce agreements modified in 2019 and beyond. If the revised agreement specifies that the new rules apply, then they do apply. If the rule change is not mentioned, the old rules remain in effect. Read the provisions of any renegotiated contract carefully when filing this year.
Health Insurance
The highly-controversial tax penalty for not having health insurance has been dismissed for tax year 2019. If a divorce or separation has led to a lack of health coverage, that no longer results in a penalty charge. This can be a significant benefit if you earned less than your spouse or were self-employed. The penalty in 2018 was $695, and it’s now gone entirely.
Consult with an Attorney
Some of these tax changes can even affect divorce agreement renegotiations. It’s to your benefit to understand how they may affect previous or current divorce agreements. Consulting with a divorce attorney can help you decide whether you need to modify your current agreements or adjust upcoming agreements. If you’re concerned about how your divorce or separation will affect your taxes, you can schedule a consultation with one of our divorce attorneys today.
