Four Things Divorcing Couples Must Know Under the TCJA

Published by Taylor Financial Group

Going through a divorce is never a smooth and easy process but the new Tax Act further complicates things. Whether you are divorced for years, or just starting the process now, the Tax Cuts and Jobs Act (TCJA) contains some drastic changes that can affect your divorce. We have boiled it down to four major changes that you should be aware of.

1. Alimony is no longer deductible. Alimony has been deductible since 1942 for the paying spouse, and taxable to the receiving spouse. However, this has all come to an end for divorces finalized on or after January 1, 2019. The individual responsible for paying alimony can no longer claim the payments as a tax deduction under the TCJA. In addition, the spouse who receives alimony will no longer be required to report the alimony as income.  Although this may sound like a benefit to the recipient, it could have the opposite effect. The paying spouse may contribute less due to the newly imposed tax burden. This could leave both individuals with less income and more of a tax burden.

2. Division of investments and assets just became more complicated. If you are receiving alimony and you are in a lower tax bracket after your divorce you could greatly benefit since you will no longer be paying tax on the alimony you receive. Having said that, it may make sense for the individual in the lower tax bracket to receive investment assets in a divorce to qualify for a reduced capital gains tax rate. The lower earning spouse may also want to consider a property settlement in lieu of child support or alimony, as over one third of these payments are not fully made and now child support is no longer receiving tax preferential treatment.

3. Under the TCJA, the State and Local Tax (SALT) cap is $10,000 per return.  This means that you may want to reconsider keeping the house during a divorce. Divorcing couples could consider selling their marital home, downsizing, relocating to a tax-friendlier state, renting or even taking a reverse mortgage if you have reached the age 62 or above. These strategies can improve cash flow and relieve some of the tax consequences of owning an expensive home (if it isn’t feasible).

4. Review your prenup. The new tax law changes can alter the valuation of assets and complicate prior prenuptial agreements. It is critical to carefully review prior agreements as some may contain clauses regarding the deduction of alimony payments from taxable income. In addition, assets that were once highly valued may be more of a tax-burden under the new tax laws. It is important to review the fine print with your attorney and with us to discuss what strategies are most fitting to your situation.

5. Child tax provisions are a silver lining.  On the bright side, the TCJA has increased the child tax credit to $2,000 per qualifying child ages 17 and under (up from $1,000 in prior years). In addition, the new tax laws also allow a $500 credit for non-qualifying dependents who are claimed such as, elderly parents and college-aged children. The income phase-out rules have also increased drastically and now they are up to $200,000 for individuals and $400,000 for married couples. This is a dollar-for-dollar tax credit and is refundable up to $1,400 which is a huge tax savings for parents.

By frequently monitoring and re-adjusting your personal financial plan you can stay on track despite any bumps in the road with some help from us. It is critical during this difficult time to find ways to increase your cash flow, discuss tax consequences and implement strategies that realign your savings goals.  Contact us today to discuss what strategies we can put in place for you.

This piece, seminar, brochure, etc. is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.