Couples can be overwhelmed by the number of issues that arise during a divorce. From creating a workable parenting schedule to dividing assets and the payment of support, getting a divorce can be complicated and stressful.
New legislation recently passed by Congress has created additional special concerns for divorcing spouses. Among other modifications, “The Tax Cuts and Jobs Act” has made significant changes to divorcing individuals who have minor children, pay or receive alimony, or wish to take advantage of the benefits of the head of household filing status.
Like divorce, taxes—and tax law in particular—can be complex. With the help of a great divorce mediator, you and your family can navigate the new changes to the tax laws while saving time and money by avoiding traditional divorce litigation.
6 Ways “The Tax Cuts and Jobs Act” Can Affect Your Divorce
The changes contained in “The Tax Cuts and Jobs Act” can create special concerns for divorcing spouses in 6 basic ways:
- No more tax exemption for children
- The Child Tax Credit is doubled to $2,000 per child under age 17
- The phase-out for the Child Tax Credit is now much higher ($200,000) and therefore there are now more couples eligible to negotiate who gets the credit
- The head of household filing status is now more advantageous
- All agreements and divorces signed in 2018 and not modified in subsequent years fit under the old alimony rules, namely that alimony is deductible by the payor and taxable income to the payee
- Agreements, divorces and modifications signed after December 31, 2018 will not have alimony be deductible by the payor or taxable to the payee
Parents of minor children: tax exemptions and the Child Tax Credit
The new law will eliminate the dependency exemption for children while modifying the Child Tax Credit in two ways. First, parents of children under the age of 17 will now receive a $2,000 credit for each child, doubling the previous credit of $1,000 per child. Second, the phase-out amount for Child Tax Credit eligibility has been increased to $200,000, expanding the number of families who are eligible and allowing more parties to use the Child Tax Credit as a negotiating tool during mediation.
Taking advantage of the head of household status
Being able to qualify for head of household status is even more advantageous under the new tax law, thanks in part to a higher standard deduction. To qualify for head of household status, you must be unmarried or considered unmarried at the end of the year, in addition to paying more than half the cost of maintaining your home for the year and have one or more qualifying dependents who have lived with you for at least half of the year.
Your divorce mediator can help you explore how the head of household status can be used to best advantage in your situation.
Alimony Deduction will be eliminated
One of the most significant implications of the new tax law for divorcing couples is the change in the way alimony is taxed and deducted.
Alimony—also known as spousal support or maintenance—is money paid by one party (typically the higher-earning spouse) to the other. The purpose of the payments is to help the lower-income spouse adjust to life post-divorce: examples of how alimony can be used include obtaining housing, purchasing a car, or receiving an education or job training to help the party become self-sufficient. Alimony can be paid out in different intervals—though typical arrangements require monthly payments—and can be paid either for a set amount of time or indefinitely (until remarriage or death).
Previously, alimony payments were deductible by the payor spouse and were taxed as income for the payee spouse. Under the new legislation, however, a spouse who pays alimony no longer receives a tax deduction and the alimony payments are no longer reportable by the payee.
The new tax legislation with respect to alimony only applies to those couples who enter into an agreement or obtain a divorce after December 31, 2018 which makes the timing of your divorce especially important.
Agreements and modifications signed after December 31, 2018 will not have alimony be deductible by the payor or taxable to the payee. It remains to be seen what changes, if any, will be made to the existing laws regarding spousal support in New York given this significant change in the tax law. Your mediator will help you understand how this impacts your settlement.
Understanding what the new tax legislation means for your family
While the tax legislation can create special concerns for divorcing couples, it’s important for the spouses to work together to try to mitigate some of the challenges under the new law. An experienced mediator can help the couple better understand what the new tax legislation means for their family and help them to find a solution that is mutually advantageous.