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.

Define Your Priorities

A major benefit of divorce mediation is that it allows spouses to creatively craft their own solutions to the unique issues affecting their divorce. Mediation generally focuses on the final resolution, rather than on who “won” or who “lost” the divorce. That said, every divorcing spouse can and should identify specific goals that they would like to achieve through the mediation process.

Knowing there are multiple issues that need to be worked out, it is best to first determine what your goals are, while hazarding a guess at what your spouse wants too. You may be surprised when some of your goals align.

Perhaps you both agree the marital home needs to be sold. Or maybe both parents want to ensure the children stay in the same school. Even if your goals and your spouse’s goals do not align exactly that does not mean they contradict each other. Without knowing your goals, the process can become a bit more complicated and messy.

I recommend you make a list of the top-10 results you would like to see from the divorce. Once you have made the list, number the results in order of importance to you. This simple exercise can pay big dividends once the negotiation begins.

For example, if staying in the marital home is your biggest goal, you should probably prioritize this goal instead of driving a hard bargain elsewhere. If you are having trouble prioritizing your goals, it might help to think of issues in terms of worries and concerns, rather than specific divorce-related issues. For example, many spouses are very concerned with cash flow following a divorce. In other words, will the spouse have sufficient cash resources to meet his or her ongoing expenses. Concerns about cash flow often affect multiple divorce-related issues, including child support, alimony, asset division or even parenting time, to the extent that increased parenting time can mean increased costs. If your mediator knows that cash flow is a major concern, the mediator can help find creative compromises that stretch the available funds.

What Should We Do With The House?

If you’re considering divorce, the first question for most couples is: “What should we do with the house?”

The family home is usually the biggest asset to divide. Plus, it’s more than just property. You may have ties to the neighborhood, your kids are happy in their school, and you’ve invested time, energy and love into creating a home there.

In this blog posting Jeff Weaver talks about four of the most common questions and how to deal with them.

1. Do we have to refinance the house in a divorce? Can’t we have one spouse’s name removed from the deed?
2. At what stage of divorce should we start the refinance application process?
3. The bank is asking for a copy of our divorce decree as a condition for the loan. But we can’t finalize the divorce until we’ve refinanced the mortgage. What should we do?
4. We have to finalize the divorce now, but the mortgage refinance hasn’t been approved yet. How can I protect myself financially?