Be Aware: The New Tax Law is Making Divorce With Alimony More Expensive for You

When couples are in the middle of their divorce, the tax implications of the divorce are not usually at the forefront of their minds. However, the new Tax Cuts and Jobs Act (TCJA) is changing this in some dramatic and unwelcome ways that may push many couples to speed up their divorce proceedings this year.

The major issue deals with taxes on alimony payments. Under the prior tax laws, alimony payments (i.e. the money paid by one spouse to the other for maintenance and support) were tax deductible for the payer. Many divorce agreements were and are negotiated keeping this benefit in mind for the paying spouse, as it would take some of the sting out of being required to make those monthly payments. Similarly, the receiving spouse had to declare those payments as taxable income and pay taxes on them.

Under the TCJA, however, the alimony tax deduction/taxable income declaration is no more. Starting January 1, 2019, alimony payments made under divorce agreements signed on January 1, 2019 or later will no longer be deductible for the paying spouse. Similarly, the receiving spouse will no longer have to declare the payments as taxable income. This represents a potentially huge burden for the paying spouse as they will no longer be able to realize the tax savings from being able to write off what is sometimes substantial amounts of money each year. Thus, there will likely be a significant uptick in divorces in 2018 to take advantage of the credit before the window closes.

For divorce agreements signed before January 1, 2019, the tax deduction will still be allowed and the taxable income must still be declared, provided the agreement satisfies the list of specific tax law requirements. The TCJA tax requirements will apply to divorce agreements signed prior to the January 1, 2019 date if those agreements are amended after January 1, 2019 and the modification specifically endorses that the TCJA tax treatment of alimony payments now applies.

Another radical change in the tax code involves child tax credits. The TCJA doubled the tax credit from $1,000 to $2,000 for each dependent child. Since this is a credit, not a tax deduction, the credit is applied directly to your overall tax liability to the IRS. For example, if you owe $5,000 to the IRS for the year, and have one child, the $2,000 tax deduction will drop your tax burden to $3,000. Another new change under the law is to make the tax credit also partially refundable. Specifically, $1,400 of the credit is refundable, which means that if a taxpayer ends up with no tax liability, they will actually get that $1,400 back in the form of a refund.

It is important to note, however, that while the tax credit is going up, the TCJA also eliminated virtually all personal deductions including those related to child care. However, the increase in a credit versus the elimination of a deduction may still be a net benefit overall.

We Can Help!

If you have questions about how the new tax law will affect you and your family, especially if you are divorcing or have minor dependents, contact the experienced attorneys at Rotella & Hernandez to learn about your options. Now is the time to call 786-571-8472; well before the 2018 tax year ends!

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone
Credit cards accepted