HIGHLIGHTS OF THE TAX REFORM AND ITS IMPACT ON DIVORCE
Marital & Family Law Section
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This law brings the
most significant
changes to our tax
code in decades.
T
he 2017 Tax Cuts and
Job Acts (TCJA) was
signed by President
Trump in December
2017. This law brings the most
significant changes to our tax
code in decades. The effect of
this overhaul is now upon us,
and we are now just starting to
understand its real influence.
Perhaps the biggest change
for family law practitioners is
the change to the beneficial tax
treatment of alimony. Starting on
December 31, 2018, alimony will
no longer be deductible by the
payor and taxable for the receiver.
This is so whether the alimony
was agreed to by the parties or
ordered by the court. Now, alimony
(or spousal support) is treated the
same as child support and calculated
on an after-tax basis. This can
significantly change the amount
paid and received because it
eliminates the ability to shift income
to a lower tax bracket spouse,
which resulted in less total tax paid
before the TCJA was enacted. This
change to tax treatment may make
negotiations more difficult, because
less cash may be available for
support, since more goes to taxes.
Of course, there are other
changes as well. For instance,
although filing statuses have
remained the same, tax rates have
changed. In particular, the highest
tax rate went from 39.6 percent
down to 37 percent. On a related
note, the marriage penalty was
eliminated, so the tax rate for
married filing separate is half of
that for married couples filing
jointly, except for high-income
couples. The removal of the
marriage penalty may be important
for couples going through a divorce,
because they can avoid joint
liability by filing separately, while at
the same time avoid higher taxes.
Taxpayers can now either opt for
itemized deductions or standard
deductions to reduce their taxable
income. Even though total overall
itemized deductions are now
unlimited, the SALT (State and
Local Deductions) are limited to
$10,000. High-income wage earners
or those who live in states with high
income taxes, including states such
as New York and California, may
be the most affected by this change.
Furthermore, some itemized
deductions were either modified
(e.g. home mortgage interest is now
limited to acquisition indebtedness
of $750,000) or completely removed
(miscellaneous deductions such as
tax preparation fees, unreimbursed
employee expenses, and legal fees
paid to attorneys attributable to
securing spousal support).
Many taxpayers will likely elect
the standard deductions, since they
have increased significantly. For
instance, the standard deduction
for single filers went from $6,350
to $12,000. For married couples
filing jointly, it went from $12,700
to $24,000.
Personal exemptions also were
eliminated, but the child tax credit
was increased. In 2017, taxpayers
could deduct $4,500 from their
taxable income for each dependent
(typically children). This amount is
now $0. But, the child tax credit, a
dollar-for-dollar reduction in the
actual tax owed, was doubled from
$1,000 to $2,000 per child. The
child tax credit can only be taken if
the taxpayer can claim the child as
a dependent. A non-custodial parent
can receive the child tax credit
through Tax Form 8332, which must
be prepared by the custodial parent
for the non-custodial parent to claim
the child as a dependent.
A few other changes include the
C Corporation rate reduction and
an increase in the lifetime estate
tax exemption.
Author:
Marie-Eve
Girard,
CPA/ABV –
Girard &
Johnson LLC
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