[Updated for conference committee update] Each house of Congress recently passed tax reform bills and a conference committee has “compromised” on the differences to produce a uniform bill to be considered by both houses.
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 two main areas of impact.
First, the tax reform bill 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 conference bill cap 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). So perhaps some divorcing couples will be able to use the increased standard deduction? That would probably depend on specific circumstances. The personal exemptions are also eliminated. That took $4050 per person (including dependents) off of income. However, the child tax credit is doubled to $2000 to offset these losses.
The conference bill keeps the current home capital gains regulations.
Another area of concern for divorcing couples who own a home is a change to the capital gains exclusion. Currently, there is a $500,000 capital gains exclusion for a couple who has used the home as a primary residence for 2 of the last 5 years. Both bills keep the $500,000 but change the time component to 5 out of the last 8 years. So, if a divorcing couple hasn’t been in their home for 5 years and wants to sell the home, they may owe taxes if their home appreciated in value. Maybe one spouse will need to continue living in the home to meet the 5 year standard to avoid paying capital gains taxes?
There are also a few other deductions that are eliminated in the bill. The moving expense deduction is suspended from 2018-2025. The home mortgage deduction also faces proposed changes. Currently, homeowners can deduct up to $1.1 million in the acquisition and home equity loan interest. The new bill would lower that to $750,000 for new loans (and cap it at $1,000,000 for existing loans) and eliminate the deductibility of home equity loans (unless used for improvements on the home).
While many tax brackets would be lowered, these bills are 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 and potential divorcing couples that they could be impacted by tax reform.
Again, this may or may not pass. Or it may be modified. I will update/re-post should something change or be enacted into law. In the meantime, this is something for you to think about or call your congressional representative on.