Important changes have taken place to the tax laws regarding spousal support, and dependency exemptions, among other important changes.
There still seems to be a great deal of confusion regarding the impact of the Tax Cuts and Jobs Act that became law on December 22, 2017. Many key features of prior versions of the tax code enabled divorce attorneys to craft settlements for their clients that were beneficial to both parties, thereby creating a win-win. This article attempts to highlight some of the key features of the changes, but does not purport to be an exhaustive list. These bullet points represent the key changes to the tax code, which will affect most divorced, or divorcing parties. To be safe however, you should always consult with your tax advisor regarding the specific facts of your case—this article is designed to highlight key features and changes and may not apply to your specific situation.
- Spousal support, which in the past could have been tax-deductible, is no longer deductible by the payor (person who pays spousal support), for all divorces from and after January 1, 2019.
- For divorces from and after January 1, 2019, the payee (person who receives spousal support) no longer needs to include spousal support payments as part of their income for Federal income tax purposes.
- Spousal support for divorces concluded prior to January 1, 2019 may still be deducted from the income of the payor after 2018, and included in the income of the payee if that is what the court order provides.
- Spousal support for divorces concluded prior to January 1, 2019 by payees, which was deemed to be deductible by the payor, must still be included by the payee with their income for Federal income tax purposes.
- If spousal support for a divorce prior to January 1, 2019 is modified after January 1, 2019, it may still be deductible by the payor and included as additional income for the payee provided that modifications after December 31, 2018 do not invoke the terms of the 2017 Tax Cuts and Jobs Act.
- Personal exemptions have been eliminated and for Federal income tax purposes, there is not currently a need to fight over which parent will get to claim a minor child, or children as an exemption.
- The Child Tax Credit has been increased from $1,000.00 to $2,000.00 per child.
- Refundable portion of Child Tax Credit limited to $1,400.00 per child.
- To be a “Qualifying Child”, the child must:
- Be under age 17 at the end of the tax year;
- Be a US citizen, US national, or US resident alien; and,
- Be a qualified dependent.
- Most tax brackets have been lowered and for most families, the range is now 12% to 37%.
- Standard deduction amounts have been increased.
- Single- $12,000.00
- Head of Household- $18,000.00
- Married filing Jointly- $24,000.00
- The qualified uses for 529 plans have been expanded to include distributions of up to $10,000.00 for tuition paid for elementary or secondary schools, whether private, public or religious, with said distributions being tax-free.
SUMMARY POINTS TO CONSIDER
- Concluding a pending or contemplated divorce prior to December 31, 2018 will provide the parties with maximum options and benefits under current tax law.
- Revisions or modifications to spousal support, or child support must include consideration given to the tax treatment of spousal support and child support going forward beyond 2018.
- Modifications of child support should include a provision as to who may claim Head of Household status.
- The dependency exemption rules are still relevant to the consideration of which parent will be able to receive the partially refundable child tax credit.
These changes represent a fundamental shift in the tax code, and provisions that divorcing couples, single parents, their attorneys, accountants and tax preparers have relied on for years. To understand how these changes will affect you in 2018, and in the future, contact us to discuss your matter.