Couples considering a divorce in the year 2019 may suddenly find themselves facing unexpected financial repercussions that did not come into effect until the New Year. Namely: alimony payments can no longer be deducted from the payer’s taxable income, and the alimony recipient will most likely not be required to add the payments to their taxable income.
A second change to tax law in 2019 is that no one may file for a personal tax exemption, even if they have dependent children. However, the available Child Tax Credit has doubled for children under the age of 17, making matters of official legal custody still just as important when filing taxes.
In response to these developments, spouses who plan on divorcing will want to consider the financial effects any court-ordered alimony or child custody arrangements will have on their tax returns. They can choose to work with Orlando family law attorneys who will be able to help them strategize in light of these changes — and potentially even use them to request modifications to any pending divorce agreements they have.
Overall, the changes to the tax laws that involve divorce are relatively simple, but how they affect divorce can be quite complex. You can use the following information in conjunction with legal advice from an Orlando family law attorney to ensure you get the optimal outcome for your divorce.
What Is the 2017 Tax Cuts and Jobs Act (TCJA), And Why Would It Affect Divorce Proceedings?
Signed into law on December 22, 2017, the 2017 Tax Cuts and Jobs Act (TCJA) had far-reaching consequences that will take years before they are fully felt. While the law was a windfall for corporations and many tax brackets, others will feel the sting when long-standing tax deductions are no longer available to them.
None of this is meant as a slight towards the law nor a politically aligned statement one way or the other. Even still, the simple fact remains that the TCJA made major changes to tax law that disrupt standard divorce outcomes as they have stood for 75 years. Individuals getting a divorce this year may get caught by surprise if they were not made aware of how the changes the TCJA introduced to tax law will affect them.
The most significant effect of the TCJA is that it reduced tax rates for corporations from 35% to 21%. Individual income tax brackets were also adjusted slightly downward, with the biggest reduction going to households that make $84,200 a year for individuals ($168,400 for couples), reducing their taxable income rate from 28% to 24%. Most of these provisions were written as a temporary measure, and they are set to expire after December 31, 2025 unless new laws make them permanent.
Tax reductions created by the TCJA meant more money left over for many companies and individuals, but the law needed a method to curb the huge corresponding reduction in the government’s tax income. Otherwise, yearly deficit spending would surpass its current record levels, creating a massive budget imbalance.
To achieve their goal of tightening up the budget deficit created by the TCJA, lawmakers went after common tax deductions individuals use to reduce their quantity of taxable income. In fact, most forms of spending no longer qualify individuals for a tax deduction — even individual charitable donations.
Since alimony payments and dependent children similarly no longer qualify an individual for a tax deduction or exemption, the TCJA has had additional consequences for Americans seeking a divorce past December 31, 2018.
How the 2017 Tax Cuts and Jobs Act Affects Alimony
One of the biggest effects of the TCJA for divorcing couples is that alimony payments no longer reduce the payer’s income and no longer increase the recipient’s. Instead, the payer pays taxes on nearly all of their income earned, regardless of whether some of it went straight from their pocket to their ex-spouse’s by way of alimony payments.
To explain why this is such a big change, let’s back up a bit to the creation of the personal income tax code in the 1940s. At the time, lawmakers were trying to determine ways to determine taxable income in a way that felt fair to their constituents. One such way was to allow individuals who made court ordered alimony payments to simply pretend that income never existed. Instead, the individual who received the alimony payments would report it as their own income.
For example, Person A made $50,000 last year but had to give $1,000 monthly to their ex-spouse, Person B, who started making $18,000 per year after their divorce (not counting alimony).
That total yearly amount of $12,000 reduces Person A’s taxable income to $38,000, lowering the volume of taxes they pay overall and potentially bumping them down to a lower tax bracket. Meanwhile, Person B’s taxable income increases to $30,000 a year.
Since Person A’s taxable income would likely be in a higher tax bracket than Person B’s, such an arrangement typically results in a slightly lower net tax income for the government compared to if Person A reported their alimony payments on their income. Seeking to close any gaps in revenues they can, lawmakers drafting the TCJA decided to eliminate the tax deduction alimony payments once granted.
How the 2017 Tax Cuts and Jobs Act Affects Child Support and Child Dependents
As mentioned above, the TCJA eliminated all individual tax exemptions. Instead, individuals get a higher standard deduction that applies to their total taxable income.
For divorcing couples, this elimination of the child dependent tax deduction means that receiving full-time legal custody status no longer affects available tax exemptions.
However, individuals can still file for a child tax credit. In fact, this credit has doubled from $1,000 to $2,000. Accordingly, the final agreement on child custody may still have tax consequences for divorcing couples.
How the 2017 TCJA Affects Florida State Income Tax Laws
It is important to note that the elimination of the federal child tax exemption does not apply to Florida’s state income tax. However, changes to Florida tax law intended to reflect the TCJA do eliminate the alimony tax deduction.
Accordingly, individuals should calculate both their projected federal and state income tax debt when filing taxes for 2019 next year.
Why You Should Consider the TCJA Changes in Your Divorce Agreement
Divorce law has remained relatively stable over the past few decades, so major changes like the ones the TCJA act introduced may not be reflected in the legal precedents established.
For example, the alimony calculation guidelines may not take into account the fact that an individual receiving alimony will not pay taxes on that income. An individual undergoing a divorce will want the final decision on alimony and child support to reflect these changes. Accordingly, they may request to a judge or put forth a proposed divorce arrangement that reduces the expected amount of alimony by an amount appropriate to the adjusted tax situation.
Similarly, an individual receiving custody of a child will not necessarily reduce their tax burden just by claiming custody. In turn, they may want to work with Orlando family law attorneys who can make a reasonable request to increase the proposed child support arrangement to reflect their increased tax burden.
How Orlando Family Law Attorneys Can Help You Adjust Your Strategy During Your Divorce
Most of the issues presented above seem like something a divorcing couple will want to discuss with an accountant rather than a lawyer. However, the changes do have a profound effect on the optimal legal strategy they may take during their divorce. They may also want to make changes to their final divorce alimony and child support arrangements as the financial consequences of the 2017 TCJA come fully into view.
So while it is always a great idea to speak with an accountant while assessing your overall financial situation during a divorce, they can only provide part of the picture as far as a complete strategy for accomplishing your overall goals. Working with an experienced Orlando family attorney adds those missing pieces, especially since they will be able to predict how the final tax law will be put into effect and apply to specific circumstances after a divorce.
Consider speaking with a divorce lawyer with knowledge of upcoming law changes if you intend to file for divorce in 2019 and beyond. You can reach out to us via our phone number or contact us online to schedule an appointment.