Going through a divorce understandably takes time and energy, and can leave aspects of life left on the backburner. If you are separated from your spouse or going through a divorce, taxes are typically not top of mind.
However, due to the recent tax reform bill, there are major changes that impact divorce.
This bill has three specific areas to keep an eye on alimony, deductions, and child tax credit.
We want all clients to be informed about the decisions they have to make, and how the law generally applies. The information provided below is NOT tax advice.
It is a general discussion about how recent changes in the law may impact the decisions you make in divorce. This NOT a substitute for legal advice that addresses your unique situation.
This is a tax term, and can easily be confused. Some confuse alimony with other commonly used terms for periodic payments owed by one spouse to the other spouse after the divorce, including spousal support or spousal maintenance.
Historically, alimony was tax deductible by the payer and taxable to the payee. It also provided an incentive to shift taxable income from the higher earner (who is usually taxed at a higher rate) to the lower earner (who is presumably taxed at a lower rate).
However, under the new 2017 bill, the payer can’t deduct the payment. Also, the person receiving doesn’t need to claim the support as income. All divorces finalized on or after January 1, 2019, will be subject to the new tax laws.
While the tax incentives go away for the periodic payment known as alimony, there are still other benefits available to divorcing spouses who want to consider a post-divorce monthly payment as an option.
For example, structuring a payment plan as spousal maintenance under the Texas Family Code can ensure that the obligation is enforceable (similar to child support), and also non-dischargeable in bankruptcy.
2. Itemized Deductions
For couples going through a divorce that claim deductions and itemize taxes, there are significant changes.
- Legal fees paid to your attorney directly attributable to securing spousal support are no longer deductible.
- Interest on mortgages can be deducted up to $750,000 (in the past it was up to$1 Million).
- Tax preparation fees are no longer deductible.
- Individuals who take out home equity loans will no longer be able to deduct the loan interest.
- There are new higher standard deductions:
- $12,000 for Single filer
- $18,000 for Head of Household
- $24,000 for Married filing Joint (meaning many are not likely to itemize in the future)
While there are a lot of issues divorcing couples are not likely to agree on, usually, everyone can agree that is best to make sure the amount of taxes are minimized.
With careful tax planning by a tax professional, divorcing couples can make sure they maximize the tax benefits available to them as part of the overall division of assets and liabilities.
3. Dependency Exemptions and Child Tax Credit
The new tax bill has effectively eliminated personal/dependent exemptions for federal taxes. From 2018 onward, neither parent may declare a child as a dependency exemption.
However, the standard deduction amounts have increased.
Under the new bill, Child Tax Credit has doubled from $1,000 to $2,000 per qualifying child but remains a credit, not a deduction.
To qualify a child, the dependent must be 17 at the end of the year. For dependents older than 17, or who are otherwise ineligible for the Child Tax Credit, the new tax law establishes a $500 credit. Just as before, you can only claim the child tax credit if you claim the child as a dependent.
For a non-custodial parent to receive this benefit, the custodial parent must agree and assign that right (via Tax Form 8332) to the non-custodial parent in the years they will be permitted to claim a dependent child in their tax filing.
Although these tax reforms may have complicated implications for individuals facing divorce, with the right professionals on your team, we can make sure you take advantage of the changing tax landscape to the greatest extent possible.
While we are not tax professionals and do not give tax advice, we regularly work with tax attorneys, CPAs, and financial planners as part of the divorce process, to make sure our clients do not overlook the tax implications.
At Hargrave Family Law, we have years of experience and expertise in helping our clients craft creative and positive settlement agreements for their most challenging issues. Let us help you today!