Dividing assets during a divorce is difficult and draining on many levels, but when you're going through it after sweeping changes to the tax code, like there were this year with the passage of the Tax Cuts and Jobs Act, it gets a lot more complicated.
But, like everything when you're dealing with a divorce, forewarned is forearmed. Here are some of the things that might be impacted by the new tax laws.
In the past, the issue of alimony has bedeviled people on all sides of a divorce, mainly because there wasn't any uniform system. States had their own rules governing who is going to pay what, and when. But one thing was clear. The payer could deduct alimony from his or her taxes and the recipient had to pay income tax on it.
Now, that's out. The payers can't claim alimony on their taxes, and the recipient doesn't have to pay tax on it.
On the one hand, it seems to benefit the lower wage earner who is the recipient of alimony, oftentimes the woman, by relieving the tax burden, but in practice, it might mean she simply gets less in alimony because the spouse will argue he (or she) can't afford more because of the new law.
In addition, taking away the ability to write off that alimony for the payer also takes away a carrot in the mediation process when hashing out such agreements between warring spouses. It also could derail the whole process if setting up two households is simply too expensive.
Married filing separately tax status
In the past, it was not advisable for married couples, even ones who were separated in both living arrangements and finances, to file under "married filing separately" tax status because of the so-called "marriage penalty." In other words, they'd pay more in taxes filing separately rather than jointly if they were still legally married. The new law eliminates that penalty, allowing more couples to choose that status.
Standard deductions and child tax credits
Individual exemptions for the filer, the spouse and the children were eliminated, but there's a higher standard deduction that will reduce the need to itemize deductions for lower- and middle-class filers. And your child tax credit is refundable, which means you'll get the credit back even if you don't owe anything.
Home mortgage interest
Mortgage interest and taking children as tax dependents have long been used in mediation efforts: One spouse takes the home mortgage interest, and the other gets the kids as tax dependents. This has changed, because the standard deduction was raised, thus eliminating the benefit of deductible home mortgage interest. It has also eliminated deducting home equity mortgage interest.
This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances.