What the New Tax Laws Mean for Divorced/Divorcing Couples
Although we are not tax professionals nor do we claim to be experts on the subject, we at Kevin Hickey Law Partners can tell you how the new tax laws approved by Congress as part of Tax Cuts and Jobs Act (TCJA) will affect you. These new tax laws will have an effect on millions of Americans. In addition to the standard yearly adjustments for things like cost of living, retirement savings and inflation, the new tax reform impacts couples initiating divorce now or in the future, those that pay and receive alimony/spousal support and those that have utilized child exemptions. Remember, spousal support/alimony is when regular payments are made or received after a divorce that are agreed upon by both spouses or determined by the court. Spousal support has tax implications that affect both parties when filing yearly tax returns. The new tax laws also affect child support as personal/dependent exemptions for federal taxes have been eliminated.
The old tax laws concerning alimony/spousal support used to allow the payer to deduct the payments from their income and the person receiving the support had to claim it as taxable income. Under the new tax laws, spousal support payments will be no longer deductible by the payer nor considered taxable income for the recipient. In a nutshell, the payer loses out on a deduction and the recipient receives tax-free income.
A few things to make note about regarding this new law regarding spousal support payments is that it only applies to divorce agreements finalized after December 31, 2018. What this means for you:
- Divorce decrees entered on January 1, 2019 or after will be affected.
- Any modifications made to spousal support agreements prior to 2019 will be affected by the new law. Therefore, if debating on making any changes it is advisable to consider all implications including long-term tax consequences. Modifications require a formal petition, careful consideration and detailed legal work that is advisable to consult an experienced attorney to weigh all benefits and encumbrances related to the modification.
As I mentioned earlier, the TCJA has eliminated personal/dependent exemptions for federal taxes. The no longer exist. Unlike spousal support payments, the new tax law applies to both existing agreements/orders to pay child support and future orders and agreements AND this particular portion of the law commenced on January 1, 2018. What this ultimately means is when you file your federal taxes for 2018 and all other years going forward neither parent will be able to declare any children as exemptions on their federal tax returns regardless of what previous agreements/orders state. You will not be able to reduce the income that is subject to tax by the exemption amount for each person included on your tax return as you have in the past. However, changes were also made to the standard deduction amount and Child Tax Credit may offset the exemption loss for most family and could result in a larger refund. The tax reform increased the maximum credit to $2,000 per qualifying child and up to $1,400 of that credit can be refundable for each qualifying child as the additional tax credit. Additionally, the income threshold at which the child tax credit begins to phase out increased to $200,000 or $400,000 if married filing jointly. Ultimately, couples will still have to work out some kind of agreement as to whom is taking the child tax credit. As of the writing of this, Arkansas has not conformed to certain provisions in the Tax Cuts and Jobs Act (TCJA).
In addition to the above changes, it is important to keep in mind that if a couple is divorced as of December 31; they are required to file their tax return as single taxpayers for that year even if the couple lived together as a married couple for more than half the year. Many couples are surprised to find that their marriage tax break goes away for that year.
We at Kevin Hickey Law Partners will work with your tax professional to ensure the right decisions are made for you involving tax implications. We can help strategically negotiate for lesser payments due to the lack of deductions for payers or we can help receiving spouses protect their rights and interests. We have a great team of people who are dedicated to your legal care and two locations, Fort Smith and Rogers, Arkansas to better serve you.