On December 22, 2017 President Trump signed into law the Tax Cuts and Jobs Act of 2017 (“TCJA”), marking the first significant tax reform in over 30 years. Given the voluminous nature of the Act, the IRS continues to issue tax reform guidance, and regulations since its enactment. Individuals contemplating or seeking a divorce should be aware of the following changes the Act made in family law, which might influence different aspects of divorce starting in 2019:
The most notable family law changes of the Tax Cuts and Jobs Act are its treatment of alimony. Prior to the passage of the Act, alimony payments had been treated as an above-the-line deduction for the Payor and were included as income for the Payee. Thus, the amount of alimony paid by a Payor was often grossed up to account for the taxes the Payee would be required to pay on alimony he or she received. However, passage of the Act fundamentally changed how alimony is handled beginning January 1, 2019. By repealing the tax deduction for alimony payments, the Act made alimony a non-taxable event, similar to child support payments. Parties no longer need to tax-effect alimony payments. Specifically, the Act provides that for any divorce or separation agreement executed after December 31, 2018, alimony payments are not deductible by the Payor spouse and are not included in the income of the Payee spouse. Instead, alimony is taxed at the rates applicable to the Payor spouse only. However, if a divorce or separation agreement executed before December 31, 2018 is subsequently modified, the Act will apply only if the modification expressly states that the new amendments apply.
Enactment of the Tax Cuts and Jobs Act doubled the amount an individual could claim for each qualifying child under the age of 17. Prior to the Act, the child tax credit was $1,000 per child. The Act increased this amount to $2,000 per child. In addition, the Act also increased the phaseout thresholds for the Child Tax Credit. Pursuant to the Act, the threshold amounts increased from $110,000 to $400,000 for joint filers and from $75,000 (or $55,000 for married filing separate) to $200,000 for all other categories. In addition, the Act requires that in order for a taxpayer to be able to claim a qualifying child under this section, the taxpayer must provide a valid social security number for each child at issue. These changes are temporary and are set to expire December 31, 2025.
The Tax Cuts and Jobs Act also established a new, nonrefundable credit of $500 per qualified dependent (that does not otherwise qualify for the Child Tax Credit). It appears that a child who would otherwise qualify for the Child Tax Credit but for the fact he or she is 17 or older, qualifies for the new $500 family tax credit. The partial credit might also apply to other family dependents such as a child under 19, a full-time student under age 24, a disabled child of any age, or a qualifying relative.
Another well-known change to the Internal Revenue Code is the increase of the standard deduction. Under prior law, an individual either applied the standard deduction or itemized deductions, along with taking personal exemption deductions, to reduce his or her adjusted gross income. Prior to the enactment of the Act, the standard deductions were: $12,700 for joint returns; $6,350 for single/filing married but separate; and $9,350 for head of household. As shown below, the Act essentially doubles the standard deduction for each of these categories, but only for tax years 2018-2025:
Amount of Standard Deduction for taxable years beginning after 2017 and before 2026:
|Joint Return||Single||Head of Household|
For tax years 2018 through 2025, the standard deductions are almost double those for 2017. However, because the Act roughly doubles the standard deduction, Section 11041 of the Act temporarily repeals the deduction for personal exemptions for taxable years between January 1, 2018 and December 31, 2025, along with a variety of other exemptions previously allowed in prior years. It is important to note that since the Act merely suspends and does not repeal personal exemptions, it is possible for divorcing parties to contract for dependency exemptions for their minor children in the event such exemptions are resurrected in the future.
Under the TCJA, 529 accounts are now permitted to distribute up to $10,000 for tuition for the beneficiary’s attendance at any secondary school, regardless of whether it is a public, private, or religious institution. This means families may now use the tax advantages of 529 accounts to pay for education expenses associated with K-12, in addition to college. However, it is important to note that the $10,000 limitation described above is applied per student, not per 529 account. Any amount in excess of the $10,000 per year per child shall be treated as a distribution subject to tax under the general distribution rules for 529 plans.
Another significant change of the Act is the allowance of 529 accounts to be rolled over into an ABLE (Achieving a Better Life Experience) account without penalty. The caveat is that the ABLE account must be owned by the designated beneficiary of the 529 account or a member of the designated beneficiary’s family in order for the rollover to occur without penalty. However, the definition of “members of the family” is broad and includes individuals such as in-laws, step-parents, siblings, or spouses of anyone included in definition of members of the family.
ABLE accounts are similar to 529 accounts in that provide tax advantages, but are only for qualified beneficiaries who are disabled or blind. Between January 1, 2018 and December 31, 2025, distributions from 529 accounts may be rolled over into ABLE accounts, subject to the above limitations. The total combined contributions cannot exceed the annual contribution limits for ABLE accounts ($15,000 for 2018) or the excess contributions will generally be counted in the designated beneficiary’s income. In addition, between January 1, 2018 and December 31, 2025, designated beneficiaries of ABLE accounts and their families may contribute more than the normal contribution limits; however, the additional amount cannot exceed the designated beneficiary’s taxable compensation for that particular tax year, or the designated poverty line amount for a one-person household.
*Please note that Meredith L. Cross is an attorney and not a certified public accountant or tax specialist. You should seek the advice of a certified public accountant or other advisor who specializes in tax issues to be fully advised of any tax consequences that may result from your separation or divorce.