New Tax Law Significantly Impacts Couples Going Through Divorce
While much has been made of the changes to alimony, there are plenty of other changes that will impact the negotiation of divorce settlements.
The new tax reform act impacts almost everyone; however, it contains some significant provisions that impact families going through divorce. In this excellent blog posting, Michael Wayland discusses how the new law will impact how couples, mediators, lawyers, and courts look at the financial issues involved in divorce.
Tax Status - Often, in divorce, there is negotiation over who will deduct one or more children so that a parent (or both parents in the case of each parent claiming at least one child) could qualify for head of household status. The more tax favorable head of household status has not been eliminated, however, some of the tax advantage is now gone.
Standard Deductions and Child Tax Credit - The new tax law eliminates the deduction for individual exemptions for the taxpayer, the spouse, and their dependents (currently $4,050 each). In divorce, this change will somewhat reduce the fight over who “gets” to deduct the children as a dependent, but certainly not eliminate it, because the child tax credit doubles from the current $1,000 to $2,000, and because of the head of household filing status.
Medical Expenses - Currently, medical expenses in excess of 10% of adjusted gross income (AGI) are deductible as an itemized deduction. For 2017 and 2018, this will drop to expenses in excess of just 7.5% of AGI.
Alimony or Spousal Support - This is a significant change from the past. Under the current law, what is variably referred to as alimony, spousal support, or separate maintenance, is deductible for the payor and taxable to the recipient. Under the new law, for divorces or separation agreements effective January 1, 2019, there will not be a tax impact. That is, it will no longer be deductible for the payor, nor taxable to the recipient.