Towards the end of 2018, all talk was about the 2018 Tax Cuts & Jobs Act and its changes to the treatment of alimony. The deductibility of alimony for payors (and the inclusion of alimony in income for the recipients) ended in 2018. There were rushes to the courthouse in order to complete divorces. Attorneys were burning the midnight oil to finish settlement agreements, and judges were staying late, often forgoing planned vacations in order to accommodate litigants who settled prior to the New Year.
Now that 2018 is over, it is time to focus on the other changes to the tax code which significantly impact family law cases. These were sometimes overlooked as the focus of the last 12 months was alimony. But the other changes in the law have equally, and in some cases more, important repercussions for families.
Mind you, this blog is in no way a substitute for sound advice from an accountant. It is, however, intended to open eyes to issues which should be raised in a family law case.
Gone are any “rules of thumb” that have been talked about in prior times. Indeed, the new regulations, and how they are to be implemented are still being written by the IRS!
Deductions for Children
For families with older children, this is an area that is having a significant impact on divorces. The good news is that the childcare credit has increased for qualifying children. For example, in 2017 a taxpayer was able to claim a $1000 credit on their income tax return for each child under 17 who qualified. That deduction has doubled to $2000 per qualifying credit and the refundable portion can go up to $1400.
For families with older children, however, the news is not as good. That’s because prior to the new tax law, taxpayers could claim an exemption for themselves as well as their eligible dependents. For parents with children in college, this typically meant the college student could still be claimed as a dependent (which was often alternated by the parents).
Now, however, all personal and dependent exemptions for tax years 2018 through 2025 have been suspended. There is a higher standard deduction, but this may not make up for the fact that a parent can no longer take a dependent exemption for a college student.
Beginning in tax year 2018, parents can use up to $10,000 per year of distribution from a 529 account not only for college but for elementary and secondary schools. For some families, this may make a significant difference in being able to pay for private school education post-divorce or split up.
Mortgage Interest Deductions
Limits on mortgage interest deduction is going to affect some families. Under the new law, the portion of a mortgage on which you can deduct interest is limited to $750,000 as compared to the prior limit of 1 million. This becomes important, particularly for instances in which homes equity is used to make an equitable distribution payment.
SALT (State and Local Taxes)
The state local and property tax deduction is now limited to $10,000 (combined). In New Jersey, this is having a significant effect on homeowners, and in turn, parties to a divorce who expect to keep the marital home.
Self Employed Individuals
There have been significant and drastic changes in the tax code that is going to make substantial changes in the amount of taxes that will be paid by self-employed individuals. Individuals who work in a personal service industry will be treated differently than other business owners. It is going to be imperative to make sure that cases with a party who is self-employed or who is the owner of a business receive special attention.
To make things even more complicated, certain states such as New York and New Jersey are considering legislation and in some cases still operating under the scenarios by which deductions can be taken under the old scenario. As a result, what is good for the goose (federal) is not necessarily good for the gander (state) and all of these issues have to be considered when negotiating an overall settlement, or preparing for trial in which the court needs to understand what the tax ramifications will be for any decision.
The upshot of all of this is that far more attention has to be paid to the tax consequences of any settlement scenario in family matters. We will also see more cases in which attorneys are using the services of accountants to run scenarios in order to assist in coming to the best possible resolution. This is new territory for all of us, and a team approach is the best answer.