How Changes to Federal Tax Law Affect Your Family Law Case
The federal Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. The most sweeping change in federal tax law in over three decades, the TCJA changed a lot of things about tax law that most people took for granted, including effects on their divorce or custody matter. The legal landscape for divorcing couples now looks quite a bit different as a result of the TCJA. Let’s talk about how changes to federal tax law affect your family law case.
Thinking about taxes has always been a component of family law cases. Especially in a divorce or child custody matter, a choice that might seem neutral on its face could have a big tax benefit for one party, and a corresponding tax burden for the other. It is important to understand the tax implications of your family law matter before you agree to a settlement.
Perhaps one of the biggest changes to divorce cases as a result of the TCJA is the change in the taxability of maintenance (alimony). In the past, maintenance was taxable income to the person receiving it, and tax deductible to the person paying it. The TCJA changed all that.
Under the TCJA, maintenance is now taxable to the payer, and not to the recipient. This will result in more taxes being paid on maintenance payments, as payers of maintenance are often in a higher tax bracket than recipients. To illustrate, let’s take a payer of maintenance who is in the 32% tax bracket, and a recipient in the 22% tax bracket, with an annual payment of $10,000. If maintenance were taxed to the recipient, as previously, he or she would pay $2,200 in income tax on that payment. Now, because maintenance is taxed to the payer, he or she will pay $3,200 in income tax on that money.
This may be good news to the federal government, but it’s bad news for the couple. The person paying maintenance may be unwilling to pay as much as previously, since he or she can’t deduct it on their tax return. The person receiving maintenance may receive a lower payment, meaning there is less income in his or her pocket as well.
The old tax rules continue to apply to divorces finalized before January 1, 2019. However, if a party seeks to modify maintenance from a pre-2019 divorce after that date, the new rules could apply to the modified order, so tread carefully if that would be a disadvantage to you.
Child Tax Credit
The TCJA is good news for people claiming the child tax credit (CTC); the new law doubled the credit from $1000 per qualifying child, to $2000.
What is a “qualifying child?”
- The child is under age 17.
- The child is related to you. This includes not only your children, but stepchildren, foster children, siblings, nieces and nephews, and grandchildren who otherwise qualify.
- You claim the child as a dependent on your U.S. federal income tax return.
- The child is a U.S. citizen or U.S. national, or a U.S. resident alien who has a Social Security Number (SSN).
- The child has lived with you for more than half of the tax year, taking into account allowable absence exceptions for school, medical treatment, vacations, and military service.
- The child does not provide more than half of their own support.
The change in the CTC may make it more attractive for parents to seek a custody order that would allow them to have the child living with them for more than half the year.
If you have a dependent child between the ages of 17 and 24, you are not eligible for the CTC. However, you may be eligible for a separate $500 credit.
Changes to the Standard Deduction and Personal Exemptions
You are probably already aware that the TCJA eliminated the personal exemption. In 2018, taxpayers received a personal exemption of $4,050 for themselves and each dependent they claimed. The total amount of personal exemptions was subtracted from the taxpayer’s taxable income, along with either the standard deduction or itemized deductions.
The TCJA did away with personal exemptions, but doubled the standard deduction to $12,000 for single filers and $24,000 for married filers. This change primarily helped families with fewer children; families with more children or older dependents could be paying more in tax.
In the past, the right to claim an exemption for a dependent child was often a bargaining chip in divorce settlement negotiations. Now, the exemption no longer exists.
Changes to Deductions for Homeowners
If you hope to be awarded the marital home in your divorce, that may not be as beneficial, tax-wise, as it was a few years ago. Deductions for state and local taxes (SALT) now have a $10,000 cap. Similarly, deductions for home mortgage interest and home equity loan interest have been restricted. While tax deductions are not the only reason to keep your house, you may want to take them into account in deciding whether the marital home is worth fighting for in your divorce.
If you have further questions about how changes to federal tax law might affect your family law case, please contact McKenna Law to schedule a consultation.