The Tax Cuts and Jobs Act has many implications for your Long Island divorce, as it pertains to Spousal Support (aka Alimony) and the Child Tax Credit. The new tax rules may mean you want to speed up your divorce to have it settled before the end of the year (when the new rules take effect).

What is the Tax Cuts & Jobs Act?

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law by the Federal Government, taking effect for the 2018 tax year. The law drastically changes how individuals and businesses will file their taxes in the future. The law will also affect how many individuals negotiate and/or resolve their divorces.

Highlights of the Tax Cuts and Jobs Act

Changes to Standard Deductions

The IRS is encouraging individuals to do away with itemizing their deductions by increasing the standard deduction. For singles, the new standard deduction is $12,000 (up from $6,350.00) and for married couples it is $24,000 (up from $12,700).

Changes to Itemized Deductions

Notably, the IRS is limiting the real estate tax deduction to $10,000. Mortgage interest is limited to the first $750,000 borrowed to purchase a home.  Additionally, home equity interest will no longer be deductible.

Changes to Spousal Support

Commencing January 1, 2019, Spousal Support payments will no longer be deductible by the payor. This means that the payee will no longer claim spousal support payments as income and will not have to pay taxes on those payments.

Child Tax Credit

The child tax credit has increased to $2,000 per qualified child (up to and including age 16).  The credit allows you to reduce your Federal tax bill by $2,000 if you owe, but, limits a refund to $1,400 under the credit. You should check with your accountant to ensure you are withholding properly to take advantage of the adjusted child tax credit.

The Tax Cuts and Jobs Act offers many of other changes to the tax code.  The link to the IRS site about the changes is https://www.irs.gov/tax-reform.  You should also consider speaking to your accountant and financial advisor as soon as possible if you have not done so already.

What Does This Mean for Divorcing Couples? 

Two main areas where the changes to the tax code impact divorces on Long Island are the non-deductibility of spousal support and the child tax credit. With an increase to the child tax credit, it will be more important to negotiate which parent in the divorce will receive the credit. Absent an agreement to the contrary, the custodial parent claims the credit. For a non-custodial parent paying support who wants to claim one or more of the children, it is important to include a provision in your divorce agreement allowing you to claim the credit and directing the custodial parent to execute any forms necessary to enable the non-custodial parent to do so.

As it relates to Spousal Support (aka Alimony), the Tax Cuts and Jobs Act eliminates the deductibility of spousal support for agreements and orders entered into after December 31, 2018.  This means if you are able to finalize your divorce or divorce agreement on or before December 31, 2018, you will still be able to deduct spousal support payments.

If you are receiving spousal support payments, you will have to declare those payments as income and pay tax. For all agreements or orders dated January 1, 2019 and after, spousal support will not be tax deductible by the payor, and the payee will not have to pay tax.

Should You Divorce in 2018 or 2019?

Because of this vast change to the treatment of spousal support payments, many individuals getting divorced who find themselves in the position of having to pay spousal support will want to fast track their divorce cases and/or settlements to take advantage of the tax deductibility of spousal support.

New York State Considering Changes to Spousal Support Formula

Notwithstanding, if the spouse who will be receiving the spousal support digs in and delays a resolution thinking that they will not have to pay tax, the New York State Legislature is already considering changes to the post divorce spousal support formula to account for the fact that spousal support will not be tax deductible in the future. The current law also allows a judge to “opt-out” of the strict application of the law and to enter a spousal support order it deems fair. This will allow courts to take into account the fact that spousal support will not be tax deductible in the future.

Have Questions About How the Tax Cuts & Jobs Act will Affect your Divorce on Long Island? We Can Help

Knowing how the Tax Cuts and Jobs Act will affect your divorce is an important aspect of any divorce resolution, and, it is important to have an experienced Long Island Divorce Attorney by your side. Contact our Long Island Divorce & Family Law firm at 631-923-1910 to set up your  free consultation with one of our experienced Divorce & Family Law attorneys.