Four ways the new tax law will change divorce negotiations

Recent tax reform may impact your divorce.

The Tax Cuts and Jobs Act (TCJA) was a major overhaul to the tax code. The changes impact everything from basic tax planning to complex divorce negotiations.

Four specific ways the new law will impact divorce negotiations include:

  • Dependent exemption.
  • Child Tax Credit.
  • Education savings.
  • Alimony payments.

It is important to have a basic understanding of the impact before finalizing a divorce agreement. The following will provide a starting point.

#1: Dependent exemption

Previous tax law allowed the custodial parent to take a tax exemption when claiming a child as a dependent. The tax code defined this tax benefit as the dependent exemption. This exemption is no longer available.

#2: Child Tax Credit

The TCJA increased the available Child Tax Credit. The credit essentially results in a reduction the claiming parent's tax bill. Not only does the credit reduce the overall tax bill, it is also a refundable tax credit. This means it can result in an increase in the parent's tax refund.

Another notable change to this credit: the threshold has increased. In the past, a parent filing singly with an adjusted gross income of $75,000 or more could not qualify for the credit. The TCJA has extended this threshold to $200,000.

#3: Education savings

Parents going through a divorce may include a provision regarding education costs for children within the divorce settlement agreement. The TCJA has expanded the use of a key financial tool used to save for educational needs: the 529 plan.

Originally, the 529 plan was structured to allow funds for college payments. The TCJA has removed this limitation and allows the funds to also apply for qualifying elementary and secondary school tuition costs.

#4: Alimony payments

The Internal Revenue Service (IRS) will tax alimony payments differently under the new law. This is arguably the biggest change to impact divorce proceedings. In the past, alimony payments were a tax deduction for the paying spouse. The spouse receiving the payment would then claim the funds as income on his or her tax return. This way the IRS still got a cut, but the overall family unit realized some tax savings. The deduction also served as a tool to help negotiate a better alimony award.

Divorces that are finalized after 2018 no longer abide by these rules. Instead, the IRS will no longer provide a deduction to the paying spouse. Critics have voiced concern that this change will hurt woman and children, the largest group that tends to benefit from alimony payments. It is also important to make clear that divorces finalized before 2019 will still abide by the previous rule.

These tax concerns are complex and just one area to consider when negotiating a divorce. It is wise for anyone going through this process to seek legal counsel to better ensure their rights are represented and protected throughout the process.