5 Tax Reform Takeaways for Divorcing Clients
Now that the Tax Cuts and Jobs Act of 2017 (TCJA) has been signed into law we wanted to run through some of the changes that might affect our divorced or divorcing clients. Most importantly for our clients is the elimination of the alimony deduction. However, it doesn’t go into effect until 2019, so there is still time to put in place support orders that are deductible.
1. Individual Tax Brackets
While there are still seven tax brackets, the effective rates have been lowered, and brackets have been adjusted meaning the amount of income you take home after taxes may change, which may affect support owed or received for some clients.
2. Alimony (Spousal Support) Deduction
Speaking of support, beginning in 2019 alimony will no longer be deductible by the payor or included in the income for the payee. Since this doesn’t start until 2019, there is still an opportunity to put in place alimony agreements that will not be affected if they are implemented before the end of 2018. Additionally, any modifications made to support orders beginning in 2019 would be impacted as well.
3. Mortgage Deduction
The itemized deduction for mortgage interest will be limited to a principal amount of $750,000 beginning in 2018 and eliminates the deduction for interest paid on home equity debt. Deductions for debt placed before 2018 will be grandfathered.
4. Child Tax Credit
The child tax credit is increasing in 2018 from $1,000 to $2,000 per qualified child and while it is still subject to a phase-out for higher income earners the phase-out amount was increased, such that the higher earning spouse who could previously not benefit from the tax credit may be able to.
5. College Savings (Section 529) Plans
The funds in 529 plans have been expanded to be used for tuition at elementary or secondary public, private or religious school for up to $10,000 per student, per year. This would allow parents with kids in private schools to increase the funds in these accounts to pay for schooling.
Have questions on how these tax reforms could impact your divorce? Give us a call, and we are happy to assist you! This listing is not all-inclusive and you as always you should consult your tax advisor to determine how the new law will affect your individual tax situation.