The Tax Cuts and Jobs Act of 2017 has important ramifications for all couples considering divorce this year, but several of its provisions will be especially impactful on couples with significant assets and/or incomes. Such couples will want to seriously consider finalizing a divorce in 2018, before the new rules take effect in 2019.
The most prominent change will be the tax treatment of alimony, which has been deductible to the payer and included as taxable income to the recipient since 1942. Beginning in 2019, spousal support payments will be treated in the same way as child support payments; neither deductible nor taxable as income. While this may seem like a “win” for the recipient, it might be a “lose” for both parties. Depending on the respective tax brackets, and the amount courts decrease alimony awards to compensate for the deduction loss, both parties could end up with less.
Other changes are less dramatic but still costly. Unless one of the divorcing parties is a member of the armed forces, moving expenses incurred because of the divorce will no longer be deductible. Neither will tax preparation fees, investment advisory fees, and legal fees incurred for tax planning and to obtain taxable alimony.
Keeping the marital home may now become more expensive. It is yet unknown how mortgage companies will adapt their qualification process to account for alimony no longer being considered taxable income. The mortgage interest deduction will be available for interest paid on up to $750,000 of debt (on first and second homes combined). Interest paid on home equity loans will no longer be deductible.
The news isn’t all bad, though. It may be easier to qualify for the Child Tax Credit, recently doubled to $2,000 for children under 17. The adjusted gross income threshold has now increased to $200,000 (for a single filer), phasing out at $240,000. A parent must have the dependency exemption to qualify. Although the amount of that exemption is $0 through 2025, negotiating who is entitled to it is still important. The custodial parent, as defined by the IRS, still has some credits available, including child and dependent care expenses, education credits, and the Earned Income Credit.
The elimination of the tax deduction for alimony may lead to more couples exploring lump sum property settlements in high net worth divorce cases. To properly assess your options, be sure to consult with an experienced divorce attorney.