When the Tax Cuts and Jobs Act of 2017 passed, our Middlesex County divorce lawyers anticipated it could have a major impact on divorcing couples – particularly those who own businesses and other investments.
Certain provisions of the law went into effect in January 2018, while others became effective in January 2019.
The earlier provisions involved altering tax brackets for head of household tax filing status and eliminating deductions for certain fees and costs for attorneys, accountants, vocational counselors, and actuaries. These changes ultimately make divorce more expensive.
The change that took effect in January 2019 involved eliminating tax deductions for alimony and relief from grantor trust treatment for any trust payments made to former spouses.
Your New Jersey divorce lawyer can explain how these changes affect your case and how it might alter your goals and strategy in a divorce settlement.
Changes to Head of Household Filing Status
One of the most substantial changes made by the new law affects single parents with custody of their children who itemize their deductions. They no longer have special tax brackets when filing as the head of household if their income exceeds $51,800.
Before, single parents with custody of their kids could file as “head of household” with special tax brackets that were more advantageous than if they had filed as single. The whole idea was to give single parents with primary custody additional monetary assistance.
Supporters of the new provision argued in part that the tax break served as an incentive for a parent to assume primary custody. In practice, though, this is hardly ever the case.
By eliminating this tax benefit for single parents, the most they could benefit if using itemized deductions is about $1,400, according to the American Bar Association, compared to the approximately $4,900 they could have received before the law.
To offset this, the law does allow for a standard deduction of $18,000 for single parents with custody if they do not itemize their deductions, compared to the $12,000 standard deduction they’d be entitled to if filing as single.
The preferential tax bracket for custodial single parents will reappear in 2026, as this provision of the tax law will sunset.
Itemized Deductions for Divorce Expenses
For the most part, divorce-related expenses and fees are nondeductible personal expenses as far as the Internal Revenue Service is concerned. However, before parts of the law took effect at the start of 2018, some divorce-related expenses could be deducted as “miscellaneous.”
Specifically, 26 U.S. Code § 212 in part allowed deductions for ordinary and necessary expenses paid or incurred “for the production or collection of income” as well as for the “management, conservation or maintenance of property held for the production of income.” This could include, for instance, costs and fees incurred in determining and collecting alimony or structuring a settlement for property division or creating/submitting/enforcing a qualified domestic relations order.
However, under the new code, divorcing spouses aren’t entitled to this deduction anymore for divorce-related expenses.
This provision also sunsets Dec. 31, 2025, but in the meantime, the after-tax cost of divorce is likely to be higher.
No More Alimony Deductions
Another major, and possibly most significant change the new law ushers in is the elimination of a tax deduction for a person receiving alimony.
In the 1917 case of Gould v. Gould, the U.S. Supreme Court ruled that under the original Income Tax Act of 1913, alimony payments made directly to a divorced wife from her ex-husband wouldn’t be considered taxable as “income.” This changed with the Revenue Act of 1942, which explicitly stated alimony was taxable income and could be considered tax-deductible by the paying spouse, in effect allowing the higher income spouses (in higher tax brackets than their former spouses) to increase the amount of spousal support they could pay.
The most recent change under the TCJA means that alimony payments are longer deductible by the paying spouse as of Jan. 1, 2019. Further, the receiving spouse need not include support payments as income.
This resulted in a rush of divorce filings before the close of 2018. It’s also meant that some divorce settlement negotiations now drag on longer in cases where spouses might be worse off financially because they could no longer expect the alimony deduction.
Unlike other provisions of the tax law, this one does not expire after 2025.
It should be noted there are possible alternatives to alimony (i.e., lump-sum payments, variations of dividing assets, etc.) that may be more beneficial in your case in consideration of the tax law changes.
Our Middlesex County divorce lawyers can help you explore all your options.
To learn more about New Jersey divorce and alimony, contact Rozin | Golinder Law today at (732) 810-0034.