As one of the biggest topics in the news in recent times, you have certainly heard about the tax overhaul that was passed in Washington. Officially called the Tax Cut and Reform Bill, this measure was signed into law on December 22nd, 2017. The changes contained in this bill are sweeping, and nearly every American will be affected in one way or another. One large group of people who stands to be particularly affected is those thinking of getting a divorce.
A divorce is a huge financial event in your life, and it has powerful tax implications. The way your financial life will be impacted by a divorce is going to change due to the tax adjustments that have been passed. For alimony payments required under divorce or separation instruments that are executed after Dec. 31, 2018, the new law eliminates the deduction for alimony payments.
So, what is so different about the new tax law from a divorce perspective? Let’s look at three important changes.
Change in Deductions
For starters, there have been changes made to what is allowed as an itemized deduction. Of course, these points only impact your tax situation if you decide to itemize your return. Some of the changes are obvious in the way they impact divorcing parties, such as the inability to deduct legal fees that are directly tied to securing spousal support. Other changes will impact those getting a divorce, although not in such an obvious way. For instance, you can now only deduct interest on a mortgage up to $750,000, rather than $1,000,000. This means the deduction gained when owning such a property is reduced, and the effective value of owning the property is reduced as well. In the end, divorcing parties may have a harder time reaching a settlement, knowing the power of the mortgage interest has been reduced.
Alimony No Longer Deductible
This is a big change, and one that is certain to have an impact on divorce agreements. For divorce decrees entered before 2019 or divorce agreements executed before 2019, those paying alimony are able to deduct the amount of the payments from their taxable income. Under the new tax law, that will no longer be the case. The new tax code calls for the elimination of the alimony deduction, meaning spousal support payments will be made from post-tax dollars. This will significantly effect settlements and amounts awarded by the Court.
Child Tax Credit
Every parent knows that having children is expensive. However, some of the expense is offset by the tax advantages provided to those who have kids. Those advantages are changing, however, and the changes may impact individuals getting divorced. The dependency exemptions that have long been granted on a per-child basis are being completely eliminated. At the same time, the value of the Child Tax Credit is being increased from $1,000 to $2,000 (per qualifying child). That credit can only be claimed if you claim the child as a dependent, which you may not be able to do if you are the non-custodial parent. For those going through a divorce who want to know more about how the tax changes will impact their situation, speaking with an attorney and a tax professional is advised.