How the New Tax Law Will Affect Divorce Settlements

 Posted on January 31, 2018 in Divorce

As discussed in a previous post, the federal tax reform law passed at the end of 2017 will directly affect divorce negotiations by eliminating the alimony deduction. For all people who create a divorce settlement after Dec. 31, 2018:

• The party paying spousal support can no longer claim the payments as a deduction; and
• The spousal support recipient does not need to report the payments as taxable income.

Taxes are an important consideration when reaching a financial settlement during a divorce. Parties who would pay spousal maintenance may be more reluctant to reach an agreement without compensation elsewhere in the settlement. There are other changes to federal tax law that will affect how divorcees negotiate their settlements and file their taxes.

Child Tax Credit

The tax law reduces or eliminates some itemized tax deductions while raising the more standard deductions and credits. One example of this is how children will be accounted for in a parent’s taxes:

• The child tax credit will double to $2,000, with $1,400 of it eligible for refund; but
• The law eliminates the personal exemption, which allows a tax filer to claim a $4,050 exemption on each dependent in his or her household.

Each child can be claimed as a tax credit on only one of the divorced parents’ tax returns. Claiming a dependent also allows the parent to file as a head of household, which includes a higher standard deduction. The parent with a majority of the parenting time is usually the one to use the tax credit. However, parents can agree as part of their divorce settlement to give both parties the right to claim a child tax credit. If there are multiple children, the parents can each claim different children as credits. The new tax law may change how parents value the child tax credits.

Home Ownership and Tax Deductions

Tax considerations are also important when deciding whether to keep a home after a divorce. While there are several costs to owning the home, the owner can also claim deductions on his or her federal taxes. The new tax law will make those deductions less lucrative. The mortgage interest deduction previously allowed homeowners to deduct the interest from a mortgage of as much as $1 million. The new law reduces that limit to $750,000 for all mortgages entered after Dec. 15, 2017. People who refinance their mortgages, as divorcees often need to do, may be affected by the change. Homeowners are also responsible for paying local property taxes, which can be claimed as a federal tax deduction. However, the limit for the local property tax deduction will be lowered to $10,000.

Taxes and Divorce

You should consider the tax consequences before making financial decisions during your divorce. A Kane County divorce attorney at Goostree Law Group can calculate how the allocation of parental responsibilities and owning certain properties may affect your taxes. Schedule a free consultation by calling 630-584-4800.

Source:

http://sincemydivorce.com/need-know-new-tax-changes-divorce/