You may recall that a tax bill was passed by both chambers of Congress and signed into law by the president in late 2017. On January 1, 2019, the provisions of that new tax law became effective. The next time you file a federal income tax return, you’ll notice that things are a bit different.
If you’re in the middle of a divorce, or simply thinking about getting a divorce, you’ll need to know how these changes in the tax law may affect you. Our attorneys discuss three major changes that could change how you approach or structure your divorce.
Alimony Payments No Longer Tax Deductible
When spouses are married, it’s not uncommon for one to earn less than the other or to give up work entirely to take care of a family. That spouse may be at a significant disadvantage, financially speaking, when the couple decides to get a divorce.
Spousal support can be helpful in allowing these spouses to adjust to life after divorce and get back on their feet. The payments aren’t necessarily intended to be a replacement for a job or other income, but rather a form of assistance.
Under the old tax law, alimony was deductible by the spouse making the payment. This tax deduction helped to encourage higher-earning spouses to agree to pay their exes for a period of time. Under the new tax plan, alimony payments aren’t deductible. Now that the deduction is gone, there’s less of an incentive for spouses to agree to pay financial support to an ex.
What this could mean for you:
Nothing, if your divorce was finalized on or before December 31, 2018.
A higher tax bill if you are ordered to pay alimony in a pending or future divorce.
A highly-contested fight to secure alimony payments.
No More Personal Exemptions for Children
When a divorce involves young children, parents will have to figure out a mutually-agreeable child custody plan. Generally speaking, the parent who has primary physical custody of the child has the right to any tax deductions or credits for that child. However, some parents compromise and let the non-custodial parent reap any tax benefits. It’s important to know that the new tax law changes how children will affect your federal income tax return.
Under the old tax law, parents were entitled to a personal exemption of $4,50 (per child!) on their taxes. What does that mean? Parents could deduct $4,500 (per child!) from their Adjusted Gross Income. The lower your AGI, the less tax you owe. There was no limit on the number of exemptions a family could take. The new tax law has eliminated this exemption. Instead, the new law raises the standard deduction.
If you have a lot of kids, it may have not been raised enough to offset the loss of the personal exemption. It’s important to take a good, hard look at your tax situation and your spouse’s tax situation. Consider how losing the personal exemption for your kids may affect your tax liability. You can work with an accountant or tax attorney to determine which spouse may benefit more under the new tax law.
Increase in the Child Tax Credit
Lawmakers apparently realized that ditching the child exemption altogether may hurt many families. Its attempt to fix the problem involved increasing the Child Tax Credit. Under the old law, families could receive a credit of $1,000 per child. Under the new law, families can receive a credit of $2,000 per child under the age of 17.
A credit reduces a parent’s requirement to pay taxes. If a parent has a $2,000 tax credit, the amount of tax they’ll owe will be reduced by $2,000. The Child Tax Credit is also partially refundable. Parents can receive a refund of as much as $1,400, even if they owe no taxes, at all.
Again, sit down with your spouse and figure out how changes in the tax law will affect your divorce, child custody arrangement, and other agreements. A tax professional can help you determine which parent will benefit the most from claiming the Child Tax Credit. However, keep in mind that children can only be claimed on one tax return. Only one parent can claim a child each year.
Are you thinking about getting a divorce? Are you worried about how changes in the tax law may affect your plans? The family law attorneys at Berenji & Associates can help. Call our Los Angeles office today to schedule a free consultation.