A summary of changes in the new Tax Tax Cuts and Jobs Act.
By Gerard G. Zielinski, Certified Divorce Financial Analyst
The new Tax Bill could be titled the “Family Law Attorney’s Income Relief Act” and will have an alarming impact on previously divorced couples with children. It affects all divorce agreements where child support and/or spousal support payments were negotiated based on income tax strategies. This Tax Bill is, without question, a tax savings gift to those families that can navigate a divorce agreement cost-effectively and efficiently. Depending on the decree, it is doubtful that many family law attorneys know exactly how the courts might handle such situations. Most divorce agreements crafted to maximize family income will no longer meet those goals under the new Tax Bill. The Tax Bill could easily be a win-win situation for both parents adding as much as $8,500 annually to their income without regard to the individual but rather the parents’ combined net spendable income. But the savings available could be quite easily consumed in attorney fees.
Should your clients begin planning now?
If your client is party to a previous divorce decree that requires annual adjustments to maintain an equitable outcome, they need to begin their planning now. If your client is party to a divorce agreement that considered child tax credits as a means toward equitable settlement, they need to begin their planning now. If your client is party to a divorce agreement based on not being able to use a child tax credits and/or dependent deduction because those were phased-out for high-income earners in previous years, your client may want to revisit their old agreement now. Do nothing, and the only winner is Uncle Sam.
What has changed?
Most divorced taxpayers combined will receive an increase in their monthly net cash flow provided their individual income is less than $200,000. But where those tax savings end up might surprise you and all that depends on how your divorce decree is drafted.
Here’s a short summary of the changes that will affect nearly all divorced taxpayers with children:
- Lower individual income tax rates. Federal tax rates are between 10% and 37%. In 2017, a single tax filer would hit the 25% federal tax bracket with $47,950 in annual taxable income. In 2018, a single tax filer can have an annual income of $82,500 before they enter the 24% bracket.
- Maintenance (alimony) will no longer be tax deductible to the payor or taxable to the recipient for those decrees signed after 12/31/2018. The non-deductibility in most cases with a combined income under $315,000 will tend to increase net annual after-tax cash flow as opposed to an alimony tax deduction due to the lower and expanded individual income tax rates.
- Nearly doubles the standard deduction. The standard deduction for a single filer was $6,350 in 2017 and in 2018 it is $12,000. For a married couple, it is $24,000.
- Elimination of the personal exemption. Along with the increase in the standard deduction, the new Tax Bill eliminates the personal exemption deduction that was $4,150 per eligible person in 2017.
- Expanded Child Tax Credit. The child tax credit increased from $1,000 to $2,000 in 2018 for those children under age 17. In addition, $1,400 is refundable meaning you could still receive up to $1,400 per child even if you did not pay any federal income taxes.
- Tax Credit for Non-Child dependents. The Tax Bill added an additional tax credit of $500 for other dependents such as children age 17 and over and/or grandparents that may reside with you as an example.
Gerard G. Zielinski is a certified divorce financial analyst (CDFA) at Divorce Financial Solutions, LLC in Milwaukee, WI. Gerard has been working at DFS since 2007 and has been involved in the drafting of over 3,000 Qualified Domestic Relation Orders (QDROs). www.divfinsolutions.com
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