Some major modifications have been made to tax laws which will significantly impact the financial aspect of divorce. Signed by the president in 2017, The Tax Cuts and Jobs Act will become effective on January 1st, 2019.
The new tax bill, which replaces a bill dating over 77 years ago, will create a new source of revenue for the government, to the tune of a projected $6.9 billion over the next ten years. Which means, divorcing couples will be paying more in taxes than they have in the past.
Here is a summary of the changes that will affect divorcing couples the most.
In the past, alimony was tax deductible for the party paying it, and it wasn’t taxed as income for the party receiving it. This allowed for a significant financial advantage for divorcing couples. The original tax bill was designed in this manner to allow a potentially struggling divorcing couple a tax break to help get them on their feet. The new tax law reverses both of these exemptions. Now, alimony isn’t a deduction for the person paying, and the receiver must report the money as taxable income.
There is now a cap on deductions for mortgage interest and property taxes. The capital gains rules have also changed. In the event of selling the family home, a couple would be able to profit $500,000 before being taxed. Now, a single seller would only be able to profit $250,000 without paying any tax.
Child Tax Credits
The new tax bill also changes the allowance for child tax credits. While the child tax credit has been increased from $1,000 to $2,000, divorced parents with more than one child will need to decide who takes each child’s individual tax credit. A parent must also now earn at least $2,500 to claim the credit, and the tax credit starts to phase out at an income of $200,000 for a single parent and $400,000 for a married filer.
Prenuptial and post-nuptial Agreements.
Any agreements signed before 2019 would need to be amended to follow the new code. Most prenuptial and post-nuptial agreements contain clauses and provisions indicating which party is responsible for taxes. The new law would not support the validity of these agreements.