Tax Cuts and Jobs Act was the first major change to the American tax system in more than three decades. Ideally, this legislative reform was to create benefits to the American taxpayer. It is not disputed that it will result in major changes in how individuals may face the issues in their divorce cases. The changes include but are not limited to:
- Alimony: For decades, alimony has been tax deductible by the person paying it and has been treated as taxable income for the person receiving it. However, for divorces concluded on or after January 1, 2019 this no longer will be the case. As a result of the new tax treatment, particularly in high-income, divorcing spouses will aggressively fight to pay less in alimony, since the government will no longer subsidize these payments via the tax deduction. This could hurt the finances for some potential recipients of alimony, whose income typically falls sharply after the divorce. Lower-income spouses will likely fight to get as much alimony as possible, since the tax burden will be abolished and the payments will go further.
- Dependency Deduction: Children won’t be the tax deduction they used to be. The 2017 tax law eliminated the $4,050.00 exception for each dependent, through the year 2025. However, the standard deduction for married couples has doubled because of the 2017 tax law. Single taxpayers in 2019 will see a standard deduction of $12,000.00. Married couples will have a deduction of $24,000. For families with few children this could be good news. But if you have several children for your dependents, or your dependents are over 17, this could mean that more of your income is taxable. Fortunately, the tax code changes did lower income rates for most Americans. Also, the child tax credit has been increased. However, if your child does not qualify for the child tax credit because they are over the age of 17, they will still be eligible for a $500.00 credit under the new tax act. Credit also applies for dependents who are elderly or disabled.
- Restrictions to home owner deductions: Under the new tax code changes, the amount that you can deduct for state and local taxes is now capped at a maximum of $10,000.00 per year. There are also limits as to how much you can deduct for home equity loan interest. (Basically $750,000.00 max at the current time).
- Expanding the 529 savings plan: For many parents, saving money to send kids to college is a priority. The new tax code provides additional benefits for commencing a 529 savings account. With the old tax code, your 529 account could only be used at eligible colleges and universities. Under the new code changes, you can use your plan to cover up to $10,000.00 per year of qualifying expenses for any school and for any grade from kindergarten through 12 as well. This new language includes public, private, and religious institutions.
- Self-employed individuals: Self-employed individuals will have significant and drastic changes in the tax code in the amount of taxes that will be paid. Individuals who work in a personal service industry will be treated differently than other business owners. It is imperative to make sure that divorces for the self-employed or the owner of a business receive special attention during the divorce case. In other words, if you fall into one of those categories, make sure that you do not conclude your divorce settlement agreement or your divorce judgment or you commence your final hearing in your divorce case without having consulted with and received the advice from a qualified tax professional to learn the tax ramifications of what you are negotiating in the settlement agreement or that for which you are going in final hearing in divorce court. The failure to do so may put you at financial risk.
The above changes are only some of the radical changes that have occurred in the federal tax code. As always, when dealing with issues in a divorce case make sure that you at consult with an experienced Board-Certified Florida Marital and Family law attorney.