It is easy to overlook the long-term tax implications of decisions made in divorce. Parties are typically focused on the immediate issues of property division, spousal support, and child custody and support. Yet the legal result of divorce is a transition to a new lifestyle. In our firm’s opinion, seeing the big picture is just part of providing comprehensive advocacy to our clients.
Who Gets the Child Tax Credit?
For example, considerations of child support traditionally hinge on which parent has primary custody. This custodial parent usually takes the federal tax deduction for a dependent. However, in a joint custody arrangement, this deduction may become an item for negotiation.
Given the recent changes in the federal tax code, this tax benefit is now in the form of a child tax credit, as the dependency deduction was eliminated. As a credit, it is eligible only to parents who earn less than $240,000, with phasing out beginning at $200,000. Accordingly, the parent with the lower income may benefit more from the deduction.
Using A Grantor Trust Instead of Alimony
Another tax savvy approach might be to create a grantor trust in place of alimony. Since the tax changes no longer offer a tax deduction for alimony payments, there is less incentive to agree to alimony in divorce negotiations. Granted, the parties could turn to the court to resolve the issue of alimony.
But if parties want to save time and money through a collaborative approach, the alternative to alimony is a grantor trust. The trust would be funded with divorce assets that generate income, and the recipient would pay taxes on any distributions. This approach would eliminate the ongoing cost of making alimony payments.
Source: The New York Times, “4 Tax Strategies That Could Make a Divorce Settlement Easier,” Paul Sullivan, Apr. 19, 2019