Alimony and more under our new tax act
Dear Clients and Friends,
The new tax law passed by Congress late last year and signed into law by the President on December 22, 2017 covers a lot of ground – including family law.
For example, if you’re fortunate enough to leave a large estate to your loved ones they will now get the first $11.2 million ($22.4 million for a married couple) gift and estate tax free. In addition, the corporate tax rate on income for businesses has been cut dramatically from 35% to 21% and for individuals and families the doubling of the standard deduction and the child tax credit will lower taxes for millions – with a side bonus of allowing these taxpayers to file their taxes with a one-page tax return on their own.
Of course, Uncle Sam has to find a way to pay for these cuts and one of these ways affects divorces dramatically: the elimination of the alimony payment deduction.
In a nutshell, before the new tax law, spouses paying alimony to an ex could deduct these payments from the amount of income they were taxed on. This would often be enough to move that spouse into a lower tax bracket, which would result in all of his or her taxable income getting taxed at a lower rate. The spouse receiving the alimony payments, however, would pay income tax on those payments.
This is flipped under the new law. The paying spouse can no longer deduct alimony payments, while the recipient spouse gets his or her alimony tax free. This is a good deal for the government because the spouse paying alimony is generally in a much higher tax bracket than the spouse receiving it, meaning the government will make more money by increasing the paying spouse’s taxable income than it did from taxing the receiving spouse on the payments.
This change is a big deal in the arena of divorces. That’s because many states have “baked” the tax deduction into the formulas they use to calculate alimony payments. Judges also take tax deductibility into account when calculating alimony in order to bring about a quicker settlement.
Some good news here is that this new law will not be applied retroactively. It only applies to divorce and separation agreements signed on or after Jan. 1, 2019.
The alimony deduction is the provision most closely connected to the divorce process. But the new law includes some other controversial new revenue sources that could impact divorces as well.
For example, if you’re paying state and local taxes, including property taxes, you can now deduct only the first $10,000 you pay each year. Formerly one could deduct it all.
Additionally, If you have a home mortgage, one used to be able to deduct all interest paid on that loan each year. Now one can deduct only the interest paid on home loans of up to $750,000.
These changes don’t directly relate to divorce, but they do impact the overall financial scene that a court uses to calculate the level of support one has to pay.
There are many other factors besides taxes that intimately affect a divorce resolution and we invite you to contact us for a free phone evaluation of a family law matter concerning yourself or any others you may think we can assist to see if in fact we can be of help.
Note: Real Estate, Business and Tax Collection defense matters are also areas of our practice that we invite your inquires on as well.