Hidden Surprises in the New Tax Law

Amidst the various changes in the new tax law is an almost unnoticed change in the tax brackets for different filing status'.  The so-called marriage penalty has been virtually eliminated from the tax brackets.   At the same time the cost of married filing separately is much lower than previously but some old rules remain to challenge us to plan carefully.  These and other changes have widespread implications for how divorce will be negotiated.

The effect of the new tax law can be summed up in 7 points:

1. There is no longer a tax exemption for children.
2. The Child Tax Credit is doubled to $2,000 per child under age 17.
3. The phase out is now much higher ($200,000 per year) so the Child Tax Credit is available to many more people than before.
4. The Child Tax Credit remains negotiable between the parents, so planning options are the same as previously.
5. Head of Household filing status is now more valuable.  This makes discussion of divorcing before or after the end of the year  more important, as well as learning how both can qualify for this favorable filing status.
6. Married filing jointly, single and married filing separately are more similar than ever before.
7. Alimony rules change in 2019.  All agreements signed in 2018 fit under old alimony rules - alimony is deductible by payor and taxable income of payee.  Agreements signed in 2019 will not allow alimony to be deductible or reportable.

New Tax Law Significantly Impacts Couples Going Through Divorce

While much has been made of the changes to alimony, there are plenty of other changes that will impact the negotiation of divorce settlements.

The new tax reform act impacts almost everyone; however, it contains some significant provisions that impact families going through divorce. In this excellent blog posting, Michael Wayland discusses how the new law will impact how couples, mediators, lawyers, and courts look at the financial issues involved in divorce.

Tax Status - Often, in divorce, there is negotiation over who will deduct one or more children so that a parent (or both parents in the case of each parent claiming at least one child) could qualify for head of household status. The more tax favorable head of household status has not been eliminated, however, some of the tax advantage is now gone.

Standard Deductions and Child Tax Credit - The new tax law eliminates the deduction for individual exemptions for the taxpayer, the spouse, and their dependents (currently $4,050 each). In divorce, this change will somewhat reduce the fight over who “gets” to deduct the children as a dependent, but certainly not eliminate it, because the child tax credit doubles from the current $1,000 to $2,000, and because of the head of household filing status.

Medical Expenses - Currently, medical expenses in excess of 10% of adjusted gross income (AGI) are deductible as an itemized deduction. For 2017 and 2018, this will drop to expenses in excess of just 7.5% of AGI.

Alimony or Spousal Support - This is a significant change from the past. Under the current law, what is variably referred to as alimony, spousal support, or separate maintenance, is deductible for the payor and taxable to the recipient. Under the new law, for divorces or separation agreements effective January 1, 2019, there will not be a tax impact. That is, it will no longer be deductible for the payor, nor taxable to the recipient.

What Does the 2017 Tax Law Mean for Divorcing Couples?

In this excellent blog posting, Meredith Richardson interviews Financial Planner Jill Boynton on some of the impacts of the 2017 tax law changes on divorcing couples.

Alimony - beginning January 1, 2019, for any alimony orders issued from that date forward, the tax burden for alimony will no longer shift from the payer to the recipient. Instead, it will remain with the payer, who is often in a higher tax bracket than the recipient. The new law could mean that the payer can’t afford to pay as much alimony because there is no tax break, and the recipient will receive less alimony.

Personal Exemptions - this tax bill has done away with personal exemptions. You can no longer claim $4,050 for yourself, your spouse, and any dependents you may have. There will no longer be an issue as to claiming children as dependents, as children may no longer be claimed as dependents.

Child Tax Credit - The law has been that if you claimed a child as a dependent, you could claim the child tax credit for that child.  Now, you can no longer claim a child as a dependent, but you can claim a child tax credit.