[Updated on 2/14/18]
Congress recently passed a tax reform bill that the president signed into law. This isn’t a tax blog but a family law and divorce blog primarily for New Jersey. So let’s discuss how the tax reform might impact divorcing couples. I see three main areas of impact.
First, the tax reform law eliminates the deductibility of alimony for any new agreements made after 12/31/18. Agreement modifications made after that date could still have the tax treatment so long as the parties still desire it. Typically, the higher-earner pays alimony to a lower-earning spouse. Although the lower-earning spouse would pay taxes on the alimony received and the higher-earning spouse would be able to deduct the alimony paid, they would be in different tax brackets. So taxes paid would be at a lower rate than taxes deducted, creating some wealth thanks to that difference in tax rates. For some divorcing couples, this tax effect is very beneficial. See the alimony section on the Divorce and Taxes page.
Second is the elimination of the so-called SALT tax deductibility. SALT = State and Local Taxes. We in NJ have the highest property taxes in the country. The new law caps the combined property tax and state income tax deduction to $10,000. When couples divorce, they now have to support two households….two homes, two sets of utility bills, car insurance, etc. Plus two of everything if the couple has children. At the same time, the standard deduction would increase to $12,000 for single filers ($24,000 for married filers and $18,000 for the head of household). So perhaps some divorcing couples will be able to use the increased standard deduction? That would probably depend on specific circumstances.
The third is how exemptions are handled. Personal and dependent exemptions are eliminated, which previously took $4050 per person (including dependents) off of income. Parents would often discuss how to split or allocate the dependent exemption for their children. That is now moot. However, the child tax credit has been doubled to $2000 per child under 17 years of age. Deductions reduce taxable income while tax credits directly reduce the tax owed. Thus, a parent in the old 25% tax bracket would save about $1000 in taxes per exemption and will now save $2000 in taxes per child. The income phase-out of the child tax credit has also been increased to $200,000. So while parents lose the exemption for each minor child and themselves, the tax credit might be more valuable depending on your income. Like the old dependent exemption, the child tax credit can be assigned to either parent. And like the old exemption, it may be more valuable to one parent than the other and should be discussed (and negotiated) during the divorce process. The other trade-off for losing the exemptions is a doubling of the standard deduction, per above. In NJ, this may not be helpful since homes and taxes are expensive so itemizing deductions may still be needed if the taxpayer exceeds the standard deduction limit.
The new law keeps the current home capital gains regulations, which should help divorcing couples keep the current exemption and associated rules when selling the marital home.
There are also a few other deductions that are eliminated in the law. The moving expense deduction is suspended from 2018-2025. The home mortgage deduction also faces changes. Currently, homeowners can deduct up to $1.1 million in the acquisition and home equity loan interest. The new law lowers that to $750,000 for new loans (and cap it at $1,000,000 for existing loans) and eliminates the deductibility of home equity loans (unless used for improvements on the home).
While many tax brackets would be lowered, the new tax law is not considered good for NJ resident due to NJ’s high income and property taxes. This article is not designed to be comprehensive, but to give divorced, divorcing and potential divorcing couples that they could be impacted by tax reform.
As always, speak with a qualified tax professional before making any decisions.