I asked my friend and colleague Christine Searle of Searle Business Solutions to guest blog about the impact of the new tax law and its impact on divorce negotiations:
Divorcing couples already had a lot of tough financial decisions to make before the Tax Cut and Jobs Act was passed. Those decisions got more complicated with the stroke of a pen on December 22, 2017. The new tax law impacts almost every U.S. taxpayer. Divorcing couples and their advisors need to learn a whole new set of rules to make informed financial decisions.
Every situation is different, so getting the right advice requires input from a qualified tax professional. At a minimum, divorcing couples who are planning for an equitable and informed settlement negotiation should be aware of four areas that changed under the new tax law:
1. Tax Brackets and Filing Status -- Marginal tax brackets are now lower for most taxpayers. Filing status income levels for “married filing separately” and “head of household” were adjusted to eliminate the marriage penalty and to increase tax advantages for qualifying heads of household versus filing single. Separated couples still face the daunting task of deciding which “married” filing status results in a lower tax and provides for equitable tax deduction allocation.
2. Alimony and Spousal Support -- For divorce or separation agreements effective after December 31, 2018, alimony and spousal support or maintenance payments will not be deductible for the payer and taxable to the recipient. Removing the tax impact for both parties eliminates the need to “right size” spousal support or maintenance payments to make after-tax amounts equitable for each party. Existing agreements can be renegotiated to capture this provision.
3. Standard Deduction and Itemized Deductions -- Deciding which spouse gets to take the mortgage interest and other itemized deductions requires careful assessment, in light of the higher standard deduction amounts and new limits on some itemized deductions. Separated couples who elect the “married filing separately” status should be aware that if one spouse itemizes, the other spouse must itemize, too, even if his or her standard deduction is higher.
4. Personal Exemptions and Child Credits -- The $4,050 personal exemption is eliminated and the child tax credit is doubled from $1,000 to $2,000. These changes can be material in deciding which parent reports a child for tax purposes, on top of factors that remain in place -- accounting for any disparity in spouses’ income and tax brackets, the ability to deduct medical expenses, and use of the preferential “head of household” filing status.
The 2017 Tax Cut and Jobs Act changed more for taxpayers than we can fit into this blog post. Have more questions? Gain a better understanding of these significant tax changes by attending my workshop, “Planning Under the 2017 Tax Law”. Check upcoming dates on my website www.searlebzllc.com or contact me at Christine@searlebzllc.com to schedule a workshop for your group.
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Ellice Halpern, J.D., is a Virginia Supreme Court certified general and family mediator.