Divorce and the New Tax Reform
Feb 25, 2019
No one enjoys going through the divorce process and no one enjoys paying taxes. The Tax Cuts and Jobs Act made changes that will have an impact on divorces from December 31, 2018 going forward. The most important factors in a divorce are custody and placement of the children and the division of assets. However, it is wise to keep in mind these tax issues as you are negotiating the rest of the case.
CLAIMING KIDS AS DEPENDENTS
The general rule is whoever has the child the majority of the year gets to claim the child on their taxes. This is very simple when it comes to sole custody. However, when there is joint custody, the parents will need come to an agreement. A common solution in joint custody situations are for the parents to alternate who is able to claim the child each year.
The new tax law eliminated the personal exemption. The exemption was $4,050 in the 2017 tax year. You could deduct $4,050 off your taxable income for yourself as well as for your spouse and for each of your dependents. Even though there is no longer a personal or dependent exemption in the new tax law, there is the Child Tax Credit. The Credit has increased from $1,000 per child in 2017 to $2,000 per child beginning in 2018. The Child Tax Credit can be better than a deduction. Deductions only subtract from your taxable income. Credits are deducted from what you actually owe the IRS and are partially refundable. Therefore, who is able to claim the child as a dependent will still play a role in divorce negotiations.
The largest impact on divorces will be the change of how alimony payments are treated under the new tax law. Previously, alimony payments and child support were treated differently. Alimony payments were tax deductible for the person paying and had to be included as income for the person receiving. Child support was not tax deductible for the person paying and did not have to be counted as income for the person receiving.
The new tax law treats alimony and child support payments the same for all divorces finalized after December 31, 2018. Alimony will not no longer be tax deductible for the person paying and will no longer be counted as income for the person receiving. This is true for any divorce finalized on or after January 1, 2019. Divorces that were finalized prior to December 31, 2018 will not be affected.
This is fantastic news if you are the one receiving alimony but very alarming if you are the one paying alimony. Most likely, there will be less of an incentive for alimony payments in divorce negotiations. It is important to note, divorce orders entered before December 31, 2018 that are modified in or after 2019 can keep the old tax law unless the new modified order clearly states the change to the new tax law.
The new tax law has affected divorces in Wisconsin and across the country. When you are dealing with the end of your marriage, the last thing you are thinking about is your tax liability. Let Pedersen Law Office, LLC worry about it for you. Pedersen Law Office, LLC offers free consults in all of our areas of practice and will meet with you personally to discuss your specific circumstances and let you know how we can help you. Our law office serves the communities of Appleton, Neenah, Menasha, Oshkosh, Green Bay and their surrounding areas. (Blog posted to update Divorce and How It Will Affect Your Taxes)