The Tax Cuts and Jobs Act (“TCJA”) signed into law by President Trump, was the largest overhaul of the U.S. Tax Code since 1986.  These changes impacted almost all aspects of American life including home ownership. Over the last few posts we have detailed what has stayed the same and what has changed. In this post, we specifically look at those changes that may have an impact on those going through a divorce and how to account for changes in child credits, child deductions and spousal support.

Child Credit

TCJA increased the child tax credit to $2,000 from $1,000 for children 16 years of age and younger. The income phase out was significantly increased to $500,000 for all filers.

Student Loan Deduction

Retains current law of allowing deductibility of loan debt up to $2,500 subject to phase outs for income.

Spousal Support

TCJA eliminates spousal support deductions for all divorces and separations executed after December 31, 2018.  Also, any changes to pre-2019 agreements after December 31, 2018 can lose its deduction unless the modification agreement specifically states that the TCJA does not apply to the post-2018 modification.

Of course, for pre-2019 spousal support to qualify for an above the line deduction specific requirements must be met such as:

1. Spousal support contained in written agreement
2. Payment must be to or on behalf of spouse/ex-spouse
3. Payment cannot be state to not be Alimony
4. Ex-spouse cannot live in same house or file jointly
5. Payment must be made in cash or cash equivalent
6. Cannot be Child Support
7. Payer’s return must include Payee’s social security number
8. No obligations for Payments to Continue after Recipient’s Death

Contact Painter & Associates to help you navigate the TCJA and its implication of your divorce and dissolution

The new tax law scraps a 75-year old provision that allows a deduction for alimony payments.  Currently, the spouse paying alimony is allowed to deduct such payments from taxes and the spouse receiving such payments must include monies received through alimony as taxable income. This deduction allowed for strategic financial planning for those persons going through divorce to attempt to cope with the expenses in running two separate households.   

Under President Trump's new tax reform bill, beginning with separation agreement signed on or after January 1, 2019 the deduction for alimony payments will no longer be allowed.   

Thus, if you are thinking about divorce and spousal support may be an issue and you want to take advantage of the spousal support deduction, you have until December 31, 2018 to enter into a separation agreement to take advantage of the deduction.   

Of course, if you are the spouse that may be receiving alimony payments, there is incentive to wait until after January 1, 2019 to enter into a separation agreement.

Note, however, that spousal support may effect child support payments as calculated under Ohio law.   

Buying a Home after Divorce

Ending a marriage is not only emotionally draining, but it can be monetarily draining as well.  Be sure to consult a reputable lawyer to help you throughout your case to make sure your finances stay intact.  The good news is that despite most divorce situations, many can still qualify for a mortgage. A recent article on AOL Real Estate, "Getting a Mortgage After Divorce: Difficult, Not Impossible" outlines the steps to take.

At Painter & Westfall, we can help you navigate the paperwork needed to make sure you are financially prepared after ending your marriage.  Don't wait until it's too late, speak with an experienced lawyer to be your advocate throughout the divorce process.

Tax Considerations When Terminating a Marriage

It is again tax season. And while most of the focus is on deductions and write-offs for things such as child care to interest payments on mortgages, those in the process of obtaining a divorce or thinking about a divorce should also consider how any potential support paid to a former spouse or received from a former spouse is classified for tax purposes. 

In most divorces, any tax issues that arise primarily focus on which party gets to claim a child for federal taxes and when.  However, consideration must also be given to the payment of alimony and child support.  Alimony is deductible to the payer and is taxable to the payee.  For example, ex- husband agrees to pay the wife $5,000 in alimony and $1,000 in child support.  Child support is not deductible to the payer (husband) or taxable to the payee (wife). Alimony, however, is a tax deduction for the payer (husband) and is taxable to the payee (wife) as income.  Therefore, from the husband's point of view, it is better to pay more in alimony than child support.  While from the wife's perspective, she would rather receive support in the form of child support rather than alimony. 

Finally, in many cases debt, and who should be responsible for such debt, is an issue in dissolutions and divorces.  The implications can be dramatic.  For example, in a settlement the husband agrees to pay-off credit card debt in exchange for lower alimony payments.  The husband then  negotiates with the credit card company to settle the debt for less than half of the outstanding amount owed.  In this case, the amount of debt cancelled by the credit card company is imputed income to the wife who then receives a  1099 for the forgiveness said debt and has to pay tax on the total amount of debt forgiven as income.

Sometimes, how payments and the forgiveness of debt are structured can make all the difference in finding a resolution to a serious and, perhaps, emotional situation.  Painter & Westfall, has the knowledge and experience to help you consider all options in when going through a dissolution or divorce.