Blog Written by: Lori B. Shlionsky
On December 17, 2017 the Tax Cuts and Jobs Act of 2017 was signed by President Trump and made a number of significant modifications to the Internal Revenue Code ("IRC") that will either directly or indirectly effect newly divorcing couples. Under the Tax Cuts and Jobs Act, in all divorces occurring after Dec. 31, 2018, alimony will no longer be tax deductible for the payor, and alimony received will no longer be considered income to the payee and therefore the payee will no longer be required to pay taxes on their alimony.
For the past 75 years, alimony has been taxable to the payee and tax-deductible to the payor. Thus, when analyzing a potential alimony award, family law practitioners and judges have historically focused on the pre-tax income of the parties. However, because of this new change to the IRC, when determining an appropriate alimony award, the focus will be more on the parties' post-tax income. This will, no doubt, force both family law practitioners and the Courts to scrutinize the parties' incomes more than prior to the Act. However, agreements executed on or before December 31, 2018 will be grandfathered in. This means that so long as an agreement is reached prior to January 1, 2019, paying spouses may still take the alimony deduction and receiving spouses must still report the alimony they receive as income. It should be noted that a Final Judgment of Divorce need not be acquired by the deadline, an executed Agreement is sufficient under the law.
The Tax Cuts and Jobs Act has also repealed important deductions and exemptions related to dependent children that could affect divorce agreements. First, personal exemptions have been suspended for the tax years beginning in the tax year 2018 and ending in 2025. Therefore, during this eight-year period, divorcing parents will not be able to utilize the personal exemption for dependent children and do not need to negotiate which parent will be eligible to claim such exemption. However, agreements should not overlook negotiating the personal exemption for dependent children once this suspension expires in 2026.
Moreover, the Act increases the maximum child tax credit from $1,000 to $2,000 per qualifying child through tax year 2025. The refundable portion of the credit increases from $1,000 to $1,400, which means that taxpayers who don't owe tax can still claim a credit of up to $1,400. The higher child tax credit will be available for qualifying children under age 17, as the law prior to the Tax Cuts and Jobs Act permits. Also, the child tax credit begins to phase out for taxpayers with modified adjusted gross income of over $200,000. This phaseout more than doubles the phaseout range under the law prior to the Tax Cuts and Jobs Act. Nevertheless, in 2026, the child tax credit will change to the rules used in 2017, with a maximum credit of $1,000 per qualifying child, and lower phaseouts.
These new tax laws certainly will have a broad effect on how newly divorcing couples negotiate settlement agreements. If you are considering divorce and would like guidance on how these new tax laws may affect your settlement, please call and schedule consultation with us today.