If you are considering a divorce or in the midst of it, recent changes in the tax laws could affect you. Here are some change you should know about:
New Tax Rules for Alimony
The most significant change for divorcing couples is that alimony is no longer deductible by the payor or taxable to the recipient for divorces that occur after January 1, 2019. Unlike some other provisions in the Act, this change is not set to expire and will remain in place until further legislation is passed.
Prior to the new change taking effect, alimony is considered income to the recipient and deductible to the payor if certain requirements are met. Those requirements include: (1) payment is made in cash, (2) payment is received as part of a divorce or separation agreement (3) the agreement does not designate the payment as not includable in gross income and not allowable as a deduction, (4) spouses who are legally separated or divorced are not members of the same household at the time payment is made, (5) payments cease upon death, (6) spouses do not file joint tax returns, and (7) the payment is not fixed as child support. For those divorced prior to 2019, this tax treatment remains business as usual.
But what happens to those who modify their alimony provisions in their divorce decrees after January 1, 2019? The answer is that the same tax treatment that applied prior to 2019 will remain, unless the parties specifically agree to alter the tax treatment of alimony.
Changes to the Dependency Exemption and Child Credit
Parents who are divorced or unmarried no longer need to argue over their children’s dependency exemptions anymore. The new tax law eliminated the dependency exemptions beginning with the 2018 tax year. This new law went into effect on January 1, 2018, but did not affect 2017 tax returns. For 2017, each dependency exemption was worth $4,050 per child on federal income tax returns, going forward it is worth zero. This old law permitted the parent who had physical custody of the child more than 50% of the time to claim the dependency exemption. Parents could agree to allocate the children’s dependency exemption to the noncustodial parent by signing IRS form 8322.
Even though the dependency exemptions are eliminated beginning with the 2018 tax year, the child tax credit remains. In 2017, the child tax credit was worth up to $1,000 per qualifying child and was refundable for taxpayers with earned income of at least $3,000 and phased out for taxpayers with adjusted gross income above $75,000 ($110,000 for joint filers). Under the new tax act, the child tax credit is worth up to $2,000 per qualifying child. The cut-off age remains at 17. The refundable portion of the credit is limited to $1,400. The earned income threshold for the refundable credit was lowered to $2,500 and the credit phase out for the child tax credit increased to $200,000 ($400,000 for joint filers).
Increases for Estate and Gift Taxes
Beginning in 2018, the Federal estate and gift tax exemption for individuals has increased from $5.6 million to $11.2 million. For married couples it has increased from $11.2 million to $22.4 million. This increase is set to expire after 2025. These increases allow for creative estate planning for high net worth individuals at the time of a divorce.
Increases for Standard and Itemized Deductions
The standard deduction has increased to $12,000 for individuals, $18,000 for heads of households and $24,000 for married couples filing jointly. You cannot itemize deductions unless they exceed your standard deduction and you do not take the standard deduction.
What These Changes Mean to Divorcing Couples
Make sure you are aware of these changes and how they will affect you and your family. Discuss the new law with your divorce lawyer to ensure that you are protected.
By Attorney Aidan R. Welsh