Taxes are a painful and annoying reality for most Americans. The new tax law, called the Tax Cuts and Jobs Act (TCJA), was signed into law on December 22, 2017 by President Donald Trump, constituting the biggest tax change since the 1986 tax law signed by President Ronald Reagan. This new law will impact all American taxpayers, but if you are getting divorced, or thinking about getting divorced, there are three key changes that will affect you under this bill:
1) spousal support,
2) itemized deductions, and
3) suspension of dependency exemptions and child tax credits.
The attorneys at Smith Strong, PLC can help lead you through the divorce process to ensure that you have complied with and are getting the most out of the three main changes to the tax law in your Virginia divorce or support case.
New Tax Law (TCJA) on Spousal Support
Under current IRS code, spousal support is tax deductible by the payor and taxable to the recipient. This means that the person paying spousal support can deduct spousal support payments on their tax return. Since typically the payor is in a higher income bracket than the recipient of support, the current law is beneficial to both parties.
However, Section 11051 of TCJA repealed the deduction for spousal support payments. Under the new tax law, spousal support payments will no longer be deductible, and the spouse receiving support payments no longer has to claim the support as income. This is only effective for divorces executed or modified after December 31, 2018.
This means that spousal support will remain tax deductible to the payor and taxable to the payee for spousal support agreements finalized by the court before December 31, 2018.
Spousal Support and Tax: What About Settlement Agreements That Provide For Spousal Support But Have Not Been Incorporated Into A Court Order Before December 31, 2018?
Obtaining a court order for spousal support can take a long time to process and be entered by the court. If you have entered into a settlement agreement that provides for spousal support, but has not been incorporated into a court order before December 31, 2018, the settlement agreement will qualify as a “separation instrument” and still apply the current tax law, meaning tax deductions for payor. Internal Revenue Code Section 71(b)(2) defines a “divorce or separation instrument” as “(a) a decree of divorce or separate maintenance or a written instrument incident to such a decree, (b) a written separation agreement, or (c) a decree (not described in subparagraph (a)) requiring a spouse to make payments for the support or maintenance of the other spouse.” This means that settlement agreements addressing spousal support executed before December 31, 2018 will continue to be tax deductible to the payor and taxable to the payee.
Spousal Support and Tax: Modifications of Spousal Support After December 31, 2018
Modifications of spousal support that occur after December 31, 2018 will only apply TCJA if the modification expressly provides that TCJA apply. This means that, for example, spousal support will remain tax deductible to the payor unless the modification affirmatively states that the repeal applies.
New Tax Law (TCJA) on Itemized Deductions
Under the new tax law, the standard deduction has increased to $12,000 for single filers, $12,000 for married couples filing separately, $18,000 for the head of the household, and $24,000 for married filing jointly. This means that more people might not itemize deductions at all. This is important to divorcing parties because there are key itemized deductions that accompany both properties and debts.
Additional Itemized Deductions: Legal Fees
Additionally legal fees paid to your attorney directly related to obtaining and securing spousal support are no longer tax deductible.
Additional Itemized Deductions: Interest on Mortgage
Interest on mortgage payments that could previously be deducted up to $1 million can now only be deducted up to $750,000. Existing mortgages are grandfathered in.
Additional Itemized Deductions: Home Equity Loans
Interest on home equity loans will no longer be tax deductible under TCJA. Existing home equity loans are not grandfathered in.
Additional Itemized Deductions: Moving Expense Deductions
Moving expense deductions are no longer tax deductible under TCJA.
Additional Itemized Deductions: State and Local Taxes (Including Property Tax)
The TCJA limits the combined total for state and local tax deductions to $10,000.
Additional Itemized Deductions: Tax Preparation Fees
Tax preparation fess are no longer tax deductible under TCJA.
The new tax law has created many changes to current tax deduction codes. The attorneys at Smith Strong, PLC can help you follow the new tax code to your benefit by ensuring all deductions are properly taken in your divorce case.
New Tax Law (TCJA) on Suspension of Dependency Exemptions and Child Tax Credits
TCJA repeals and eliminates dependency exemptions from 2018 to 2025. In 2026, these exemptions will return barring no extension to the suspension. This means that as of January 1, 2018, you will no longer be able to claim a child as a dependent for purposes of obtaining a dependent exemption. In 2017, parties could exclude $4,050 for each dependent. This number will now be zero because of TCJA.
Child Tax Credits
A child tax credit is, under current law, available for you if you have a child under 17 years of age and if the child has lived with you for at least one-half of the year. Under TCJA, this child tax credit has increased to $2,000 (from $1,000 under current law). You can only claim the child tax credit if you claim the child as a dependent.
For children over 17, there is a reduced child tax credit of $500. For children over 17, certain qualifications must be met. A “qualifying child” must be under 19 years (or 24 years old if the child is a full-time student).
What To Do Next
These three critical changes to the tax law are additional hurdles for your divorce case. As more sections of TCJA become effective, case law, IRS regulations, and other legislation will arise which will clarify some of the more convoluted aspects of TCJA. The advice of an attorney at Smith Strong, PLC, who will work alongside a tax professional, will be valuable and necessary as you navigate the murky waters of TCJA in your divorce.