New Tax Rules for Divorce and Alimony Payments

Divorce is a painful reality for many people both emotionally and financially, and quite often, the last thing on anyone’s mind is the effect a divorce or separation will have on their tax situation. To make matters worse, most court decisions do not take into account the effects divorce or separation has on your tax situation, which is why it’s always a good idea to speak to an accounting professional before anything is finalized.

Furthermore, tax rules regarding divorce and separation can and do change – as they recently did under tax reform and divorced and separated individuals should be aware of tax law changes that take effect in 2019 (and affect 2019 tax returns).

Who is Impacted

The new rules relate to alimony or separate maintenance payments under a divorce or separation agreement and includes all taxpayers with:

• Divorce decrees.
• Separate maintenance decrees.
• Written separation agreements.

Tax reform did not change the tax treatment of child support payments which are not taxable to the recipient or deductible by the payor.

Timing of Agreements

Agreements executed beginning January 1, 2019. Alimony or separate maintenance payments are not deductible from the income of the payor spouse, nor are they includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after December 31, 2018.

Agreements executed on or before December 31, 2018 and then modified. The new law applies if the modification does these two things:

• Changes the terms of the alimony or separate maintenance payments.
• Specifically states that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

Agreements executed on or before December 31, 2018. Prior to tax reform, a taxpayer who made payments to a spouse or former spouse was able to deduct it on their tax return and the taxpayer who receives the payments is required to include it in their income. If an agreement was modified after that date, the agreement still follows the previous law as long as the modifications do not:

• Change the terms of the alimony or separate maintenance payments.
• Specifically state that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

Tax reform made an already complicated situation even more so. If you have any questions about the tax rules surrounding divorce and separation, don’t hesitate to call.

• By Leon Clinton
• October 8, 2019

Tax Preparation vs. Tax Planning

Many people assume tax planning is the same as tax preparation but the two are actually quite different. Let’s take a closer look:

What is Tax Preparation?

Tax preparation is the process of preparing and filing a tax return. Generally, it is a one-time event that culminates in signing your return and finding out whether you owe the IRS money or will be receiving a refund.

For most people, tax preparation involves one or two trips to your accountant (CPA), generally around tax time (i.e., between January and April), to hand over any financial documents necessary to prepare your return and then to sign your return. They will also make sure any tax reporting on your return complies with federal and state tax law.

Alternately, Individual taxpayers might use an enrolled agent, attorney, or a tax preparer who doesn’t necessarily have a professional credential. For simple returns, some individuals prepare and file their own tax forms with the IRS. No matter who prepares your tax return, however, you expect them to be trustworthy (you will be entrusting them with your personal financial details), skilled in tax preparation and to accurately file your income tax return in a timely manner.

What is Tax Planning?

Tax planning is a year-round process (as opposed to a seasonal event) and is a separate service from tax preparation. Both individuals and business owners can take advantage of tax planning services, which are typically performed by a CPA and accounting firm with in-depth experience and knowledge of tax law, rather than a tax preparer.

Examples of tax planning include bunching expenses (e.g., medical) to maximize deductions, how to use tax-loss harvesting to offset investment gains, increasing retirement plan contributions to defer income, and best timing for capital expenditures to reap the tax benefits. Good recordkeeping is also an important part of tax planning and makes it easier to pay quarterly estimated taxes, for example, or prepare tax returns the following year.

Tax planning is something that most taxpayers do not take advantage of – but should – because it can help minimize their tax liability on next year’s tax return by planning ahead. While it may mean spending more time with an accountant, say quarterly or even monthly, the tax benefit is usually worth it. By reviewing past returns an accountant will have a more clear picture of what can be done this year to save money on next year’s tax return.

If you’re ready to learn more about what strategies you can use to reduce your tax bill next year, help is just a phone call away.

• By Leon Clinton
• October 5, 2019

Tax Due Dates for October 2019

October 10

Employees who work for tips – If you received $20 or more in tips during September, report them to your employer. You can use Form 4070.

October 15

Individuals – If you have an automatic 6-month extension to file your income tax return for 2018, file Form 1040 and pay any tax, interest, and penalties due.

Corporations – File a 2018 calendar year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.

Employers Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in September.

Employers Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in September.

October 31

Employers – Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2019. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.

Certain Small Employers – Deposit any undeposited tax if your tax liability is $2,500 or more for 2019 but less than $2,500 for the third quarter.

Employers – Federal Unemployment Tax. Deposit the tax owed through September if more than $500.

• By Leon Clinton
• October 2, 2019