Taxes Too High After Your DIY Divorce? How To Fix Alimony Tax Mistakes
Way back in 2018, we spent a great deal of time alerting our readers to an upcoming new alimony tax change, and it was a big one: Any alimony order put in place after January 1, 2019 would force payor spouses to claim alimony payments as part of their taxable income, reversing the decades old rule of payors being able to deduct payments on their federal returns.
If your divorce or alimony order was finalized after January 1, 2019, your attorney almost certainly alerted you to these new tax consequences, running through various scenarios of how the change could affect your taxes and how to minimize the impact through smart settlement negotiations.
However, if you did a “Do-It-Yourself” divorce or alimony order, and your DIY divorce packet used outdated information that didn’t mention the tax change, you might be in for an unwelcome surprise when you go to file your 2019 federal income taxes and those alimony payments that you thought would be deductible are not.
If you fall into this category, you are probably wondering if there is anything you can do to fix the mistake you made.
The short answer: there may be a way to renegotiate your alimony agreement. Let’s take a look at the factors involved in making this happen.
Alimony & Taxes: Grounds for Renegotiation
So, let’s say you finalized your DIY divorce in March 2019 and agreed to pay alimony based — unknowingly — on outdated/faulty information that payments you make would be deductible. Tax time is now here for filing your 2019 return and you are shocked to find out that your taxable income is 40K higher (the amount paid in alimony). This amount pushes you into a higher tax bracket, and you realize you’re on the hook to the IRS for much more than you anticipated.
What can you do?
Everyone’s situation is different, but a good first stop is to consult with a lawyer to ask about a modification/renegotiation of your alimony agreement.
Be aware that alimony modifications usually require a “substantial change in circumstances,” such as a change in employment circumstances or other income. These grounds for a modification would generally not apply here: a unilateral change or mistake made by one party would not usually be enough to invalidate the agreement.
However, in the scenario described above, one could argue that there was a mutual mistake in the divorce/alimony settlement based on faulty information provided in the DIY divorce packet or resource you both used in creating your Marital Settlement Agreement.
The interpretation of any MSA is governed by contract law, and therefore a mutual mistake could be a basis for reforming an agreement.
The process for getting the mistake acknowledged and the agreement renegotiated could look something like this:
- First, go to your former spouse and see if they will agree that there was a mutual mistake. If both you both agree, then it might be possible to submit a revised agreement together and the courts are likely to accept it.
- A spouse who gained a benefit from the mistake, however, might deny it was mutual. Be aware of the flip side of the alimony tax change: the spouse who receives alimony payments no longer claims this money as taxable income. This is probably favorable to their own tax burden.
- If your former refuses to agree that a mistake was made, you will need to prove it to the courts. Gather your agreement, the packet you used to work through to reach terms, and any other pertinent written communication. If the agreement stated that the old law would apply, and it is impossible for the old law to apply because the IRS won’t accept it, that would be good evidence of a mutual mistake.
- If the agreement just states amounts without reference to tax effects, but there are, for example, emails talking about tax effects, or evidence that child support was calculated using the old tax law, this is other possible evidence the courts can take into consideration. Generally if an agreement is clear on its face, courts won’t look beyond it, but if it is ambiguous, they will.
- The other potential catch is that courts usually look at an entire agreement, not just one provision separately, since that is how a MSA is usually negotiated. So if everything else in your MSA is correct, but there is found to be a mutual mistake with alimony, the courts could possibly require you to start the entire MSA over from scratch.
Your best bet if you are caught up in a DIY divorce mess with alimony taxes? Reach out to your former spouse to check their willingness to negotiate some middle ground for a mutual modification, and run your results by a lawyer to ensure accuracy. If you renegotiate alimony on your own, you can avoid the costs and turmoil of going to court.
Have questions about taxes and alimony in your divorce? We can help. Contact us today to schedule an initial attorney consultation to get answers to all your questions, and a clear strategy for moving forward. Call us at 888-888-0919, or please click the button below.