An overhaul of the U.S. tax code known as the Tax Cuts and Jobs Act (TCJA) took effect at the beginning of 2018. This act could have a significant impact on couples who are currently going through a divorce, custody, or child support case. Porchlight is taking a closer look at four significant ways the TCJA could impact families and their finances.
1. Increasing the Standard Deduction: From this year (2018) through 2025, the TCJA nearly doubles the standard deduction for non-married taxpayers. That’s up from $6,350 in 2017 to $12,000 in 2018. For those who do not itemize deductions, this change excludes additional income from being taxed. This change may be beneficial for a spouse who moves out of the marital home and can no longer claim a mortgage interest deduction. However, it is also important for the spouse who moves out to note that moving expenses are no longer deductible.
2. Eliminating Dependency Exemptions: Although by default the dependency exemption went to the parent who had the child more than half the time, in previous tax years, parents could negotiate who would claim the child dependency exemption on their taxes. The exemption reduced the person’s taxable income by as much as $4,050 per child. Negotiating the dependency exemption was used to offset other expenses the non-custodial parent paid for the child or a higher amount in child support. The TCJA has eliminated that dependency exemption through 2025. For non-custodial parents who previously negotiated for the dependency exemption, this may be the ideal time to seek a modification of child support.
3. Increasing the Child Tax Credit: Parties can still negotiate for the non-custodial parent to receive the child tax credit, which otherwise can only be claimed by the custodial parent. The child tax credit is designed to provide relief for taxpayers with qualifying dependent children. The TCJA doubled the maximum child tax credit from $1,000 to $2,000 per qualifying child through 2025. The TCJA also raised the maximum income that persons can earn and still be able to claim the tax credit. Although this credit provides some room for negotiation, with the elimination of the dependent child exemption, the overall value of claiming a child on your taxes is significantly decreased.
4. Changing Deductions for Alimony. The TCJA eliminates the income tax deduction for those who pay alimony and re-categorizes those alimony payments so that they are no longer taxable income for the recipient. Previously, alimony payments were non-taxable income for the payor and taxable income for the recipient. This system enabled divorcing couples to maximize funds available to the family as a whole, as the person receiving alimony is typically in a lower tax bracket than the person paying alimony. In a climate that is already becoming less favorable towards awarding alimony, this change will likely result in smaller alimony settlements and awards. This change applies to spousal maintenance orders signed after December 31, 2018, and, unlike other provisions in the TCJA, does not end in 2025. It will not affect post-2018 modifications of previously awarded alimony unless explicitly incorporated into the modification order. However, anyone with a prenuptial agreement that addresses alimony is not grandfathered into the old tax system, as a prenuptial agreement is not a court order. Such persons may want to renegotiate alimony in a postnuptial agreement.
If you have questions about how the TCJA could impact your divorce, custody, or child support action, or if you need help with your case, contact Porchlight at (678) 435-9069 or [email protected]. Porchlight does not provide tax advice. For tax advice, you should speak with a CPA or other tax professional.