How the New Tax Bill May Affect Your Divorce

Taxes and divorce – neither of those things are fun. But did you know that the new tax bill may actually affect a divorce? There are three key changes that appear in the Tax Cut and Reform Bill which President Trump signed into law during December of last year. If you’re thinking of getting a divorce in the near future, you’ll want to review how this new law can impact the outcome. Here’s what you should know:

1. Alimony. The prior tax code says that alimony is tax deductible by the payor and taxable to the payee which means whoever is paying alimony (spousal support) is doing so with pre-tax dollars which they will be able to deduct. However, under the new tax bill, alimony will no longer be tax deductible and the spouse receiving the support does not need to claim it as income for divorces finalized in 2019 and after. The payor is traditionally the higher earner and taxed at a higher rate and the payee at a lower rate. Previously, there were less taxes to pay regarding alimony, but the new tax law results in more taxes and less money. Alimony has frequently been used as a tool in settlement to avoid a trial, but the new tax law may impact that. The good news is that if your divorce is finalized before January 1, 2019, the old tax rules still apply.
2. Dependents and Child Tax Credit. At the beginning of this year, dependency exemptions were eliminated. An exemption reduces your taxable income while a credit reduces tax liability. An exemption for a dependent (traditionally your child) is the income that you can exclude from your total taxable amount. The previous exclusion for each dependent was $4,050, however the new tax law makes that zero. The child tax credit offsets taxes you may owe per dollar and is available if you’re the parent of a child under 17 who lived with you at least half the year. The previous law allowed for as much as $1,000 per child while the new law allows for as much as $2,000 per child. However, you can only claim this tax credit if you claim the child as a dependent. When it comes to divorce, a non-custodial parent may only claim a child as a dependent if the custodial parent agrees and signs off on it.
3. Itemized deductions. There have also been some changes to tax code relating to divorcing parties that claim deductions and itemize tax returns each year. Those include:
   1. The ability to deduct interest on a mortgage has been reduced from $1 million to $750,000.
   2. You can no longer deduct legal fees directly related to spousal support.
   3. You can no longer deduct tax preparation fees. 
   4. Interest on home equity loans is no longer deductible.

Also new this year is an increase in standard deductions - $12,000 for single and $24,000 for joint filers). When it comes to divorcing parties, there are key itemized deductions that accompany property and debts and with new standard deductions, fewer people may opt to itemize.

​If you have questions about how the new tax law may affect your impending divorce, let Vener Family Law and Mediation help. Divorce and taxes are stressful enough. Let the professionals help guide you through