TAX CUTS AND JOBS ACT (TCJA) OF 2017 COMPLICATES POTENTIAL SETTLEMENT OF DIVORCE CASES

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The Tax Cuts and Jobs Act of 2017 (TCJA) enacted dramatic changes to several tax issues that directly impact how divorces are settled. If you are a high wage earner, or you’re married to one and you’re contemplating getting a divorce, there’s almost a sense of urgency toward you understanding the financial aspects of your divorce and when to file your marital settlement agreement, should you and your spouse reach one.

Heather L. Locus, an owner and wealth manager at Balasa Dinverno Foltz LLC in Chicago, defines on her Website why this could be important to you. “Many high-net-worth couples may want to move quickly in order to preserve some important financial options,” Locus writes. “Couples who finalize their divorce agreements this year have many more options since the most significant rules impacting divorce go into effect on New Year’s Day 2019.”

In a previous blog we dissected how the Tax Cuts and Jobs Act of 2017 dramatically affects spousal support payments. After January 1st, 2019, all payments between former spouses in executed divorce agreements will be treated in much the same way as shared income was during their marriage. In other words, spousal support and unallocated support payments of any kind will no longer be tax deductible by the payor spouse nor will they be taxable to the recipient spouse. It is similar to how child support payments have always been dealt with in family law. No deductions permitted.

An article written for familylawyermagazine.com entitled, New Tax Law Helps & Hurts High-Net-Worth Divorce Cases, Locus, CPA, CFP, CDFA, reminds us that there are other changes to the new tax laws and how they will impact the way divorces are settled, and they should be kept in mind when negotiating a divorce settlement. They are:

  • The Personal Exemption. It was reduced to $0 for all taxpayers this year but may return to a $4,000 exemption in 2026 unless laws change again.
  • State and Local Taxes. Deductions for state income and property taxes above $10,000 combined are gone. However, this results in fewer taxpayers being subject to the AMT.
  • Moving Expenses. Unless one of the divorcing spouses is a member of the Armed Forces, expenses incurred separating one marital household into two are no longer deductible.
  • Legal and Professional Service Fees. Tax preparation, investment advisory fees, and your legal fees incurred for tax planning and to obtain taxable alimony are also gone. Some other changes — such as the raising of estate values subject to inheritance taxes — may indirectly impact high-net worth divorce negotiations as the need for advance estate planning vehicles such as Life Insurance Trusts and Grantor Retained Annuity Trusts (GRATs) are reduced.

PERSONAL EXEMPTIONS HAVE BEEN ELIMINATED

As Locus stated above, the new tax laws eliminate personal exemptions for the tax years beginning after December 31, 2017, and ending December 31, 2025. During this eight-year period, divorcing parents will not be able to utilize the personal exemption for dependent children, which means there will be no more negotiating which parent will be eligible to take it.

Before this year, tax filers received a deduction from income for their personal exemptions, including themselves, their spouse, and their children. In divorce and separation agreements it was common for parents with children to negotiate who could use the personal exemption deduction for income and in which year, but not anymore.

CHILD TAX CREDIT INCREASES

Even with the changes in the tax laws divorcing parents will still be able to negotiate which parent will be allowed to claim the “Child Tax Credit”, and which parent will not. Similar to negotiating for personal exemptions, someone involved in a divorce would want to negotiate which spouse gets to claim the “Child Tax Credit”. An income deduction merely reduces taxable income. A “Child Tax Credit” provides a dollar-for-dollar reduction of tax owed. It is an important negotiating tool, and the TCJA doubles the “Child Tax Credit” from $1,000 to $2,000 for children under the age of 17.

Possibly of more importance, $1,400 of the $2,000 credit is refundable to the filing spouse, whereas in prior years the “Child Tax Credit” was not refundable. The “Child Tax Credit” might now be more useful than ever in divorce settlement negotiations because it immediately reduces taxes owed and it is partially refundable.

FAMILY RESIDENCE BECOMES MORE EXPENSIVE

The new limits on deductions imposed by the Tax Cuts and Jobs Act of 2017 will make the prospects of being able to afford to keep the family residence a more challenging proposition. If you took out a home mortgage to acquire your home after December 15, 2017, the TCJA now requires mortgage interest deduction to only be available for interest paid on up to $750,000 of debt on first and second homes combined. However, if your loans for first and second homes combined was created prior to December 15, 2017, you are grandfathered in. This means you have a $1 million limit for interest deductions.

The 2017 tax laws also affect how divorcing spouses will deduct their home mortgage interest payments. According to the IRS the new law suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

This means the deduction for home equity indebtedness has been repealed, unless the home equity indebtedness qualifies as “acquisition indebtedness” — ie. it was used to acquire, build, or improve a primary or secondary residence. As written, the repeal of the home equity interest deduction does not have a grandfather provision. This means all equity loan interest, regardless of when the loan was originated, will no longer be deductible if the proceeds of the equity line were not used to buy, build, or improve the primary or secondary residence.

THE WINDOW IS CLOSING

Due to the many changes in the tax laws suffused with much confusion that surrounds the new rules, your ability as a divorcing spouse to tailor your divorce agreements to suit your particular financial needs will disappear in 2019. That’s why you might want to seek guidance from a family law specialist now. Please be warned that many otherwise competent divorce lawyers are not up to speed on many of the new tax changes. So don’t assume that just any family law attorney is capable of guiding you to the best tax results in your divorce. Contact a specialist in family law who is up to date on the latest tax changes that might affect you.

 

 

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PRESIDENT TRUMP’S DECEMBER 2017 TAX PLAN ELIMINATES DEDUCTIONS FOR ALIMONY PAYMENTS

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The burden of paying spousal support is about to reverse.  That’s because there’s a new tax law called, Tax Cuts and Jobs Act (TCJA), that was passed by Congress in December 2017, that has effectively abolished tax deductions on alimony payments beginning January 1, 2019.  Under the new Tax Cuts and Jobs Act, alimony payments will be neither tax deductible for the paying spouse nor taxable in the hands of the recipient spouse.

This new law will apply to payments that are required under divorce or separation instruments that are:

(1) executed after December 31, 2018, or,

(2) modified after that date if the modification specifically states that the TCJA treatments of spousal support payments (not deductible by the payor and not taxable income tax by the recipient) applies forthwith.

This new alimony provision is not retroactive, and it does not apply to divorces and separation orders entered into before 2019.

Until this new law, paying spousal support could be considered a “win-win” situation for both divorcing spouses.  The payor receives the benefit of a reduced tax obligation and the payee receives the benefit of more income than might otherwise be forthcoming if the payor spouse wasn’t receiving the benefit of the tax deduction.

This change in law could now prove expensive for individuals who must pay spousal support, because the tax savings normally derived from deducting spousal support payments can be substantial for high-earners.  One of the biggest disadvantages of the new tax law is that it could affect the desire of a higher-earning spouse to settle with their dependent spouse, since the deduction acts as a great motivator for the higher wage earner to agree to help support the spouse with less income in the first place.

WINDOW IS STILL OPEN

There is still a window for the payor to receive deductions for spousal support payments, but that window is closing.  If you are involved in divorce proceedings, or you are thinking about divorcing, and you want deductible spousal support treatment for some or all of the payments that you will make to your soon-to-be-ex, the TCJA gives you a huge incentive to get your divorce agreement wrapped up and signed by December 31, 2018.

On the other hand, if you anticipate being the recipient of spousal support, you have a big incentive to put off finalizing your agreement until next year, because the payments will become tax-free to you.

Either way, you should contact a specialist in family law, someone who is experienced in divorce tax issues, to get the best tax results for yourself.  Tax-wise, waiting too long could turn out to be an expensive mistake for years to come.

Lastly, be warned that many otherwise competent divorce lawyers are not up to speed on many of the new tax changes.  So don’t assume that just any family law attorney is capable of guiding you to the best tax results in your divorce.  Do your homework.  Contact a specialist in family law who is up to date on the latest tax changes that might affect you.  Find out who can best represent you regarding your spousal support requirements, and other family law-related issues.

PRESIDENT TRUMP’S DECEMBER 2017 TAX PLAN ELIMINATES DEDUCTIONS FOR ALIMONY PAYMENTS

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The burden of paying spousal support is about to reverse. That’s because there’s a new tax law called, Tax Cuts and Jobs Act (TCJA), that was passed by Congress in December 2017, that has effectively abolished tax deductions on alimony payments beginning January 1, 2019. Under the new Tax Cuts and Jobs Act, alimony payments will be neither tax deductible for the paying spouse nor taxable in the hands of the recipient spouse.

This new law will apply to payments that are required under divorce or separation instruments that are:

(1) executed after December 31, 2018, or,

(2) modified after that date if the modification specifically states that the TCJA treatments of spousal support payments (not deductible by the payor and not taxable income tax by the recipient) applies forthwith.

This new alimony provision is not retroactive, and it does not apply to divorces and separation orders entered into before 2019.

Until this new law, paying spousal support could be considered a “win-win” situation for both divorcing spouses. The payor receives the benefit of a reduced tax obligation and the payee receives the benefit of more income than might otherwise be forthcoming if the payor spouse wasn’t receiving the benefit of the tax deduction.

This change in law could now prove expensive for individuals who must pay spousal support, because the tax savings normally derived from deducting spousal support payments can be substantial for high-earners. One of the biggest disadvantages of the new tax law is that it could affect the desire of a higher-earning spouse to settle with their dependent spouse, since the deduction acts as a great motivator for the higher wage earner to agree to help support the spouse with less income in the first place.

WINDOW IS STILL OPEN

There is still a window for the payor to receive deductions for spousal support payments, but that window is closing. If you are involved in divorce proceedings, or you are thinking about divorcing, and you want deductible spousal support treatment for some or all of the payments that you will make to your soon-to-be-ex, the TCJA gives you a huge incentive to get your divorce agreement wrapped up and signed by December 31, 2018.

On the other hand, if you anticipate being the recipient of spousal support, you have a big incentive to put off finalizing your agreement until next year, because the payments will become tax-free to you.

Either way, you should contact a specialist in family law, someone who is experienced in divorce tax issues, to get the best tax results for yourself. Tax-wise, waiting too long could turn out to be an expensive mistake for years to come.

Lastly, be warned that many otherwise competent divorce lawyers are not up to speed on many of the new tax changes. So don’t assume that just any family law attorney is capable of guiding you to the best tax results in your divorce. Do your homework. Contact a specialist in family law who is up to date on the latest tax changes that might affect you. Find out who can best represent you regarding your spousal support requirements, and other family law-related issues.