The Tax Cuts and Jobs Act, a sweeping overhaul of the U.S. tax code, took effect at the beginning of the year. The Act could potentially impact those who are recently divorced or are currently going through the divorce process. Bliss Law Group is taking a closer look at some of the areas related to the Tax Cuts and Jobs Act and how it affects our clients and their finances.
Spousal Maintenance
The Tax Cuts and Jobs Act (TCJA) applies to spousal maintenance orders signed after December 31, 2018. It does not affect existing divorces or separations. The Act eliminates the federal income tax deduction for those who pay spousal support and makes those spousal support payments tax-free for the recipients. In other words, those who pay spousal support cannot deduct those payments on his or her taxes and those who receive spousal support are not taxed on the payments as income. These changes are designed to ease earned income taxes, however, they could lead to additional financial stresses for families going through the process of divorce. Without the tax deduction in place for the person making the spousal support payments, the higher-earning spouse may not want to pay as much money to their ex.
Standard Deduction
From 2018 through 2025, the TCJA nearly doubles the standard deduction for single taxpayers who elect not to itemize deductions. (Up from $6,350 in 2017 to $12,000 in 2018). These changes could benefit taxpayers by excluding additional income from being taxed, however, it reduces the financial incentive to itemize certain expenses such as mortgage interests, charitable donations, or tuition payments. Many taxpayers who previously itemized their deductions may now claim the standard deduction. But it is important for those going through the divorce process to continue to track their expenses, to make sure they are selecting the tax benefit with the largest overall value to them.
Dependency Exemptions
Prior to the Tax Cuts and Jobs Act, divorcing spouses would negotiate who could claim the dependency exemption for their children. Each exemption helped reduce the parent’s taxable income by as much as $4,000. Now, the TCJA has eliminated personal and dependent exemptions, meaning that from 2018 through 2025, a parent cannot claim their child or children as dependents in order to reduce their taxable income.
Child Tax Credit
While the TCJA has eliminated the tax exemptions for dependent children, it has increased the child tax credit. From 2018 through 2025, the Act increases the maximum child tax credit to $2,000 (per qualifying child). It also raises threshold income ceiling for those who want to claim the tax credit, meaning that individuals can make more money annually and still claim the child tax credit.
The Tax Cuts and Jobs Act went into effect January 1, 2018 and is not set to expire until December 31, 2025. If you have questions about the new tax bill and how it could impact your family, you can contact Bliss Law Group at (253) 844-4412 or contact@blisslawgroup.com.