Divorce and the New Tax Laws: What You Need to Know

As if Divorce weren’t stressful enough, the GOP Tax Cuts and Jobs Act that was signed into law last December may be creating additional anxiety for divorcing couples. If you’re getting divorced or thinking about Divorce, you should absolutely be paying attention to these changes. Not understanding how they will affect your Divorce can be a very expensive mistake.

 1. Tax rates got lowered and the standard deduction got higher

• The new tax law lowered the tax rate for most taxpayers–generally good news, right? It also doubled the standard deduction that every taxpayer who didn’t itemize deductions used to get. That may make you think your income taxes will drop in 2018, but like everything this Congress does, there’s more to the story, and it’s rarely good news.
• Fewer people are likely to itemize next year because the standard deduction–what you can subtract from your income before figuring out how much taxes you owe–is nearly doubling to $12,000 for single filers, $18,000 for heads of households and $24,000 for married couples that file jointly.
• Despite lower tax rates, some filers who usually itemize could see their taxes rise because many popular deductions are being reduced or eliminated. State and local income taxes, sales taxes and property taxes were fully deductible under the old tax law. Now they are capped at a combined $10,000 annually. There are also limits on how much interesthomeowners can deduct on new mortgages.

2. Personal exemptions

• In the past, when you filed your taxes, you claimed yourself and each of your kids as dependents on your taxes. Known as “personal exemptions” or “dependency exemptions,” these tax breaks allowed you to subtract a certain amount of money from your taxable income for every dependent you claimed. The more dependents you claimed, the more money you could subtract.
• When couples divorced, they often argued over who got to claim the kids as dependents on their taxes. The new tax law has eliminated all of these personal exemptions. Beginning in 2018, and continuing through 2025, no one will get a tax exemption for claiming the kids as dependents.

3. Child tax credit

• Before 2018, the child tax credit lowered the amount of taxes that parents paid by $1,000.00 per “qualifying child.” In the new tax law, Congressincreased the amount of the child tax credit to $2,000. They also dramatically increased the amount of money that parents could make before the child tax credit gets phased out. That’s the good news.
• A child only qualifies for the child tax credit for the parent who can claim him/her as a dependent. In your Divorce settlement you still need to negotiate which parent can claim each child as a dependent. If you don’t identify who can claim the child as a dependent, you risk losing the child tax credit. That can be a big deal because the child tax credit directly reduces the amount of income tax you pay. It doesn’t just reduce your taxable income. It reduces your taxes. And really, who wouldn’t want to pay $2,000 less in taxes per year?

4. Education expenses (529 Plans)

529 Plans are special tax-advantaged savings accounts that parents could create to save money for college educational expenses.

• In the past, 529 Plans could only be used to fund “Qualified Higher Education Costs”–college tuition and certain other college expenses.
• Now, if your kids are going to private school, you or your spouse could use the kids’ college money to pay for it. That will save you from having to pay the private-school tuition yourselves.
• Under the new tax laws, parents can take up to $10,000 per year out of a child’s 529 Plan and use it to pay for that child’s elementary or secondary school tuition.
• Deciding what to do with your kids’ 529 Plans is now one more thing you can negotiate in your Divorce.

5. Moving expenses

When a couple divorces, someone has to move out. In many cases, the person who moved out also gets a new job.

• Before this year, if you were moving because of a new job, you could deduct your moving expenses from your taxable income.
• Now, you can’t, and moving can be expensive—this may be something you negotiate in your Divorce settlement.

6. Mortgage interest and HELOC payments

Under the current tax law, you can deduct the interest you pay on your home mortgage. You could deduct that interest if it was on any kind of a mortgage or home equity loan. It didn’t matter if you actually used the money to pay for your home or pay off your credit cards.

• That’s all changed now. The new tax law limits the mortgage interest deduction to interest paid on the first $750,000 of your loan—not $1,000,000.
• To be deductible, the loan must also be used to buy, build, or substantially improve the home that secures the loan. That also applies to home equity loans and lines of credit.
• The IRS has now closed a potential means of cash flow that often made settling your Divorce easier.

7. Medical expenses

The changes to the medical expense deduction are positive. Before, you could only deduct medical expenses that exceeded 10% of your adjusted gross income. Now you can deduct medical expenses that exceed 7.5% of your income. There’s a bigger chance that you’ll be able to deduct medical expenses on your taxes. Congress made this change retroactive to 2017 so that you can take advantage of this tax deduction immediately. But before you get too excited about this, be aware that there’s an insidious component to this tax change.

• From 2019 on, the deduction threshold goes back up to 10%. But get this: Congress just gave us a two-year reprieve on the medical expense deduction.
• In order to deduct medical expenses at all, you must itemize your deductions. Since fewer people will be able to itemize their deductions in 2018, fewer people will be eligible to use this deduction.

8. A repeal of the deduction for alimony payments

In a previous article, we discussed the repeal of a deduction for alimony payments, effective 2019. Potential divorcees have the rest of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses. Many believe that removing this deduction will make Divorces more acrimonious, that people won’t be willing to pay as much alimony. Since it is women who tend to earn less and are most often the recipients of alimony, many believe this tax change could disproportionately hurt women.

Consulting a tax professional

Even if you are just thinking about Divorce, it’s wise to consult an accountant or financial planner who can identify problems and opportunities for deductions that may not be apparent to you.

We’ve assisted hundreds of couples with their uncontested Divorces

If you and your spouse are in agreement about your Divorce—including division of property and a parenting plan–we can assist you and help you save a significant amount of money. Contact us at one of our three Bay Area offices to schedule an appointment. Our dedicated team is helpful, compassionate and affordable.