Tax Day 2019 has passed and most people don’t even want to think about tax returns for another nine months. If you’re going through, or recently went through, a divorce, filing taxes is one of the many simple things in your life that has changed. You no longer get the tax benefits of filing as a married couple. You are now filing single, with fewer or no dependents, might no longer have a mortgage interest deduction, etc. This year we saw great change as the taxability of alimony completely changed, eliminating the one tax advantage (commonly known as the “divorce subsidy”) that the government provided to divorced couples.
There are some things that divorced couples should know about, that can potentially put some money back in their pockets. But it cannot wait until next year during tax time. One must act now to take advantage of many programs.
If you have children, there are multiple tax benefits attached to 529 plans. If you are negotiating a child support agreement, consider having some support paid into a 529 on behalf of the minor child(ren). That arrangement will allow the payor to deduct the amounts paid into the 529 on their Maryland Tax Return. Think carefully about who will be the Account Holder of the 529. The Account Holder of the 529 must be an adult – the child is only a beneficiary. And the owner can change the Beneficiary at any time.
This can also result in an added bonus to the child, if properly done. Maryland has rolled out a program called “Save4College State Contribution Program.” (https://maryland529.com/Save4College) Qualified applications can receive up to a $500 contribution from the State into their child’s 529 plan. The Maryland 529 website lists several requirements for the program, including that the Account Holder’s Maryland taxable income cannot exceed the maximum household income range ($112,500 as an individual or $175,000 as a married couple filing jointly based on the prior year). Further the account must have been opened after December 31, 2016 (you can open a new account). The application only takes a couple minutes to complete, and applications must be turned in by May 31, 2019. If you do participate in the program, and receive a State contribution, there are restrictions on your ability to take a deduction on your State taxes for your contributions.
If you have questions about this program you should consult with a tax professional. Having an extra $500 growing in your child’s 529 can help give you piece of mind about their future. If you are more concerned about your student loans than a 529, but especially if you’re concerned about student loans and 529s, there is a Maryland tax credit that can get you up to a $5,000 refund. The application period for that tax credit doesn’t even open until July 1, 2019 – so focus on the 529 first!
IMPORTANT NOTICE: Any discussion in this blog concerning tax or legal considerations is for information purposes only and not intended to serve as a formal tax opinion or otherwise as tax or legal advice.