The recently passed GOP “Tax Cuts and Jobs Act” (TCJA) has important consequences for families – especially those who are facing divorce. Here are some specific changes in the new tax law that you should take into consideration if you’re separated or divorced.
1. The TCJA Expands the Use of 529 Accounts
529 accounts are now expanded to include private school and home-schooling.
Currently families can save for children’s college education with the use of tax protected 529 accounts. In a 529 account, your money grows free of any capital gains taxes. Previously, you could withdraw funds to pay for higher education expenses. Under the TCJA, families can now withdraw up to $10,000 per child per year to pay for private school or home-schooling education expenses. Money in a 529 account can also be rolled over to ABLE accounts, which are used for people with disabilities. In many states, parents can’t be forced to pay for higher education, and being in control of the 529 account was important in the case of divorce. Now that the 529 account can be used for private schools and home-schooling, funding and custodianship of the 529 account should be part of your property settlement discussions.
2. The TCJA Eliminates the Alimony/Spousal Support Deduction
Alimony is no longer deductible for the payor spouse or taxable for the recipient spouse.
This major change in the tax code with respect to alimony will go into effect January 1, 2019, and it could have a significant effect on negotiations in equitable distribution agreements. Understanding the effect of this dramatic change in the tax implications of alimony is important. If you currently are receiving or paying alimony, your current agreement may be modified with certain specific language to comply with the new tax rule. Talk to your divorce lawyer about whether it might be advantageous to you to revise your alimony agreement.
3. The TCJA Increases the Child Tax Credit
The child tax credit increases from $1,000 to $2,000 per child.
Families that are separating or divorcing should consider how to allocate and/or share the child tax credit. Talk to a family lawyer or financial professional specializing in divorce issues about how to use the credits to maximize their advantage.
4. The TCJA Raises Standard Deduction and Exemptions
The standard deduction nearly doubles for both individuals and married couples.
If you are in the middle of a divorce, you have a choice of how to file your taxes. For example, if you are still married by December 31 of the tax year, you can choose to file as “married” or “married filing separately.” Which status you choose could make a big difference to the taxes you will have to pay. The bottom line result of the change in the deduction and exemptions will have important implications for those who are deciding how to file their taxes during the period of separation or in the year of divorce. Ask your tax professional for advice before making your decision about how to file.
5. TCJA Reduces the Tax Benefits of Home Ownership
The new tax law reduces the interest on eligible mortgage deduction and caps the property tax deduction.
For most families, the marital home is usually one of their biggest assets. When going through a divorce, one of the first questions is often what to do with the family home: will one spouse will keep it, or will it will be sold, and when it will be sold. Those questions take on greater importance under the new tax laws – especially for high-net-worth families. The limit on a deductible mortgage has been reduced from $1 million to $750,000. The original proposal by the GOP was to cap the deduction at $500,000, but, after lobbying by the real estate industry, split the difference. This $750,000 deduction applies to all loans taken out after December 14, 2017; loans of up to $1 million taken before that date are grandfathered and are not subject to the reduced cap. Thus, if the family lives in a home with a high mortgage, and one spouse wishes to keep the house and pay the existing mortgage (which predates the TCJA), they might be able to reap the benefits of the $1 million limit. it might make sense to keep the home, rather than sell it and buy a new house. If the mortgage is in both names, however, the issue becomes removing the other spouse from the mortgage without losing the deduction, because a re-finance could create a new loan.
Matrimonial lawyers may have to come up with some creative negotiating/financing strategies to help their clients stay in the marital home without losing the grandfathered limit. If one or both spouses will be buying a new home during or after divorce, they will have to do so at the reduced limit.
The second change under the TCJA that affects all homeowners is a $10,000 cap on state and local property taxes; previously, homeowners could deduct all the property taxes they paid with no limit. This could be a consideration for divorcing couples – especially those who live in states with high property taxes – since the property tax on the marital home may be a factor in determining whether one of them can afford to stay in the home.
To learn more about how the new tax law could affect you, you should contact your accountant or tax attorney. If you are contemplating or are in the midst of a divorce, be sure to discuss these items with your attorney.
Philadelphia family law attorney Phyllis Bookspan, JD, is a highly respected legal professional with 30 years combined experience as practitioner, law professor, clinical director, trial lawyer, and scholar. www.Bookspanlaw.com