January 1, 2018
The Republican Tax Bill recently enacted has something for everyone – but not necessarily something positive. Let’s look at how the bill may affect divorcing couples.
Alimony: Probably the most important aspect of the bill, for divorcing couples, is the removal of the tax deduction for alimony payments, for divorces after 12/31/18. Fortunately, this doesn’t impact divorces for another year (get ready for a deluge of 2018 divorces!). When it does take effect, the alimony-payor spouse of a couple will no longer be able to deduct alimony payments from taxable income. On the flip side the spouse receiving alimony won’t have to declare it as income. I expect that because of this tax change we will see payor spouses offering less in alimony since he or she has to use after-tax money. In many cases this is a lose-lose situation for both parties: although the payee spouse in the past had to declare these payments as income, typically that spouse was in a lower income tax bracket than the payor. It’s possible the payee will end up with less money.
Personal Exemption: Another big change is the elimination of the personal exemption. Until 2018 taxpayers were allowed a deduction ($4,050 in 2017) for each spouse and each dependent child. That’s a lot of deduction now gone but hey, at least there is no more discussion of who gets to claim the children on their tax return.
Standard Deduction: We may have lost our personal exemptions, but on the flip side the standard deduction has almost doubled. Single filers can now claim a $12,000 standard deduction, and an additional $1,500 if over age 65. However, some quick math shows that this is not a fair tradeoff: a single taxpayer with just one child who used the standard deduction in the past, and would have had total deductions of $14,450 ($6,350 standard deduction + $8,100 personal exemptions), will lose $2,450 in deductions under the new law ($12,000 standard deduction + $0 personal exemptions).
State and Local Tax Deduction: The new bill caps the deduction for all state and local taxes at $10,000. This includes property tax, personal property tax and state sales and income tax. This could be a big hit for our clients who live in New Hampshire but work in Maine or Massachusetts. It can also affect housing values in towns with high property tax.
There are some changes that could be positive for your divorcing clients:
Tax Brackets: The new bill has the same seven tax brackets, but the rates are a few percentages lower and the highest bracket is now 37% (down from 39.5%).
Child Tax Credit: This credit is doubled to $2,000 and allows a $500 credit for dependents other than children. The income phase-out has also more than tripled.
There’s much more to the new tax bill, and many other provisions that could affect your clients.
Of course, everyone’s tax situation is different and we really won’t know how each person is affected until we file our 2018 taxes in 2019. For divorcing couples, it won’t be sufficient to look at the couple’s past tax returns to make assumptions going forward. I recommend consulting with your client’s accountant as well as a Certified Divorce Financial Analyst.