The Tax Cuts and Jobs Act of 2017 (TCJA) will have sweeping effects on how individuals and businesses file their taxes in 2019 and onwards, with ramifications affecting even family law. If you’re in the middle of a divorce or are considering one, it may be in your best interest to wrap up your separation this year as the federal tax code could affect the tax liabilities of divorcing spouses.
Tax codes are already complicated enough—the last thing you want is to deal with tax issues and divorce at the same time, which is why it’s important to steer clear of complications while you still can. Below are more reasons to act this year and minimize the tax pain from the TCIA.
Reduced Alimony Taxes
Spousal maintenance will undergo significant changes in 2019. At present, alimony payments are deductible by the paying spouse and taxable to the receiving spouse. This means that receiving spouses can pay lower taxes by reporting alimony as income, while payors can deduct it from their tax returns. This is important, because the tax deduction can save as much as 50 percent in taxes for high-earning individuals in high-tax states.
Going forward, however, alimony will neither be deductible by the supporting spouse or taxable to the receiving spouse. This might seem like good news to the recipient, but this will likely have the effect of hurting the supporting spouse, resulting in less alimony paid. With the new tax law, the government intends to raise more than $6 billion in taxes over the next decade—that’s over $6 billion less in the pockets of divorced spouses.
By finalizing your divorce in 2018, the tax rules for alimony payments will remain as-is for the duration of your agreement. And even if you modified your divorce agreement in the future, your deductibility and taxable status will not change unless stated otherwise.
Higher Taxes on Your Home
The family home tends to be a hot-button topic in many divorce situations; the new tax law will only make discussions on what to do with the family home after a separation more complicated. For starters, the law reduces the deductibility on property taxes, as well as the amount of mortgage that can qualify for interest deduction. This has the effect of making homeownership more expensive.
Selling your home will also be more expensive. While married, you can accrue up to $500,000 in capital gains without tax consequences. When single, however, this amount falls down to $250,000. In other words, you need to decide whether to sell the home before finalizing your divorce.
Prenup and Postnup Agreements
Couples who have signed a pre-nuptial or post-nuptial agreement should take the time to review their agreements this year as the law may end up rendering some points they have agreed to moot. For example, alimony provisions affected by the new law may necessitate a re-negotiation.
If you, or a loved one, are going through a divorce schedule a consultation with family law attorney Daniella Lyttle to discuss your legal options. Call the Lyttle Law Firm today at 512.215.5225 to find out how we can help you.