Tax Law Changes May Affect Your Divorce

By Grayson Cannon

Tax Reform Act Becomes Effective 1/1/18

Major tax law changes will take effect on January 1st.  Here are a few things to know if you divorce during 2018 or thereafter:

Major Changes to Alimony Deduction

The most striking change in the new tax act for divorcing couples is on the deductibility of alimony.  Previously, alimony was usually deductible by the person paying it, and taxable income to the party receiving the alimony.

Many times an alimony payer might strategize how to structure alimony to maximize the tax benefits of payment.  Likewise, a person who anticipated receiving alimony had to consider the tax consequences of this additional income.

Under the new law alimony will no longer be deductible to the payer or taxable to the payee for all alimony orders entered on or after January 1, 2019.  Thus, the law gives everyone a year in which to deal with anticipated consequences before it will apply.

What about court orders that modify an alimony order originally entered under prior law?  Does changing the alimony amount after January 1, 2019 mean changing the deductibility?  The answer is no, unless the court orders the new law to apply.  The parties can also agree as part of the court order to apply the new non-taxable treatment.

Thus, any negotiations of alimony payments during the next year will need to take into account the future changes.  Next year will be the last opportunity to negotiate an alimony settlement where the deductibility of the payments is important.

Effect on Child Support

The new law won’t change the existing rule that child support payments are neither deductible or taxable.  It does make significant changes to the tax benefits that divorcing parents can claim for their minor children.  Divorcing couples often negotiate the right to claim one or more children as a dependent on their return as part of their parenting plan that includes the child support.

The “personal exemption” which represented a $4050 reduction in taxable income for each child claimed as a dependent is suspended beginning 1/1/18.  However, the right to claim a child may still be of benefit since other tax benefits related to minor children have increased.

Although the exemption is suspended, the child tax credit will go up from $1000 per child to $2000 and will be available to taxpayers filing single or head of household with incomes up to $200,000 who have the right to claim the child as a dependent.  The limit on the child tax credit refund goes up from $1000 to $1400.  These increased amounts and the increase in the income amount to which the credit applies will mean that more tax filers may find the child tax credit valuable to them.

Therefore, it’s likely there will still be value to parents in negotiating the right to claim one or more children; it’s just that the exact value may be different next year.  Certain child care and earned income credits are also still available to head-of-household filers under the new law.  Under the new law these changes with regard to minor children  “sunset” or end automatically on 12/31/25, so parents with very young children may find things change before their children age out.

Moral:  Get Tax Advice Before Finalizing Your Divorce

The information presented here is very basic.  This blog post is not intended to take the place of a consultation with your accountant. Your case may be different or exceptions may apply.

The most important takeaway from this: you should obtain tax advice before finalizing anything if your divorce case involves alimony or minor children.  Spending a few hundred dollars on professional advice is worthwhile.  Don’t make a mistake that could cost you thousands in your future.

Since we don’t give tax advice at Phillips & Ingrum, I’m encouraging all my clients with alimony or child deduction issues to call their accountant before we go to mediation or trial.  Being prepared can help us deal with your divorce more effectively and get the best result for you.