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H.R. 1 - P.L. 115-97, the “Tax Cuts and Jobs Act” (the “Act”) was signed into law on December 22, 2017. With this sweeping tax legislation comes several changes that will impact income taxes in the context of a divorce. The following is a summary of the more significant changes to keep in mind.
Alimony and Separate Maintenance Payments
Under the Act, there is no longer a deduction for alimony or separate maintenance paid by a taxpayer. These payments are also no longer included in the gross income of the recipient taxpayer. For court-ordered divorces and legal separations executed after December 31, 2018 (the effective date of this tax change), the alimony-paying spouse won't be able to deduct the payments, and the alimony-receiving spouse doesn't need to include them in gross income or pay federal income tax on them.
It's important to emphasize that this tax change doesn’t impact existing divorce and separation decrees and won’t impact any that are initiated before December 31, 2018. However, if the parties involved in these decrees want the Act to apply, they can update their agreement.
The Child Tax Credit
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000. The child tax credit (the “Credit”) phases out at income levels of $200,000 for single, separate and head of household filers. $1,400 of the Credit is refundable, meaning taxpayers can receive up to $1,400 of the Credit even if they do not owe income taxes.
No Credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child's social security number.
The Act also created a Non-Child Dependent Credit of $500 for certain non-child dependents. This credit is a non-refundable credit.
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero. This means no more exemptions for children. However, the dependency tests to qualify for an exemption are still enforced and used to determine which parent’s tax return reports the child in order to claim the child tax credit.
As in the past, the dependency qualification can be assigned from the custodial parent to the non-custodial parent by completing and filing an Internal Revenue Service Form 8332. “Custodial” refers to the parent with physical or legal custody of the child.
Changes to Standard/Itemized Deductions
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the following changes occur:
- The standard deduction is increased to $18,000 for head-of-household filers, and $12,000 for single and married filing separately taxpayers, with these amounts adjusted for inflation in tax years beginning after 2018.
- A taxpayer may only claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of state and local real and personal property taxes, income taxes and general sales taxes (if elected) for any tax year. The $10,000 aggregate limitation rule doesn’t apply if these taxes are paid or accrued in carrying on a trade or business.
- The deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying acquisition indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). The prior $1 million limit still applies to acquisition indebtedness incurred on or before December 15, 2017.
- The deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended.
These changes may complicate the benefits of dividing certain assets in a marital estate and any related tax benefits previously associated with the asset.
529 Account Funds
For distributions after Dec. 31, 2017, “qualified higher education expenses” now include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit (per student) per tax year.
Certain Changes to Business Owners That May Impact the Fair Market Value of Their Business Interest
The following are key provisions that affect business taxpayers:
- A New Deduction for Pass-Through Income (For Partnerships, S-Corporations and LLCs)
- Corporate Tax Rates Reduced to a Single Flat Rate of 21% (For C-Corporations)
- The Corporate Alternative Minimum Tax is Repealed
- Changes to Reporting the Acquisition and Depreciation of Capital Assets
- Increased Section 179 Expensing
- 100% Expensing of Qualified Business Assets
- Depreciation of Qualified Improvement Property
- New Limits on Deduction of Business Interest
- The Domestic Production Activities Deduction (DPAD) is Repealed
These changes have differing impacts on business taxpayers, but they generally impact cash flow, which is often the driving force behind the Fair Market Value of a business. Addressing how these changes will impact a business’s cash flow will be necessary in determining a relevant and reliable indication of value for use in the division of marital assets.
As with all tax legislation, the Internal Revenue Service may further define the application of a provision through more specific regulation. For a specific situation, you should seek the advice and guidance of a qualified tax professional.
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