The Tax Cuts and Jobs Act (TCJA) goes into effect on Jan. 1, 2019. For divorcing couples, there are some important changes that could affect asset division and spousal support.
Alimony is no longer tax deductible
Spousal support or alimony payments were previously tax deductible for the payer and counted as taxable income for the ex receiving money. However, beginning in January, the TCJA eliminates this tax deduction for alimony payments.
Spouses who earn more may be less inclined to pay alimony or may try to lower payments. However, marital property must be divided equitably during a divorce, though not necessarily evenly. This is known as equitable distribution.
There could be other payment options
Instead of spousal support payments, a divorcing couple may decide use funds from property division assets. The former partners could agree to a one-time payment to be paid out in installments over time. Property division is non-taxable, so this would be no different tax-wise than alimony payments. It may just simplify and shorten the payment process.
However, if you are the former spouse receiving the payment, you should be aware of a few things. If your ex files for bankruptcy, division of property payments will most likely be discharged. However, alimony cannot be discharged in bankruptcy. Receiving your money this way also affects your ability to collect, if your ex stops paying. Only 25 percent of his or her wages could be garnered for property division payments, while half of your ex’s salary could be garnered for past due alimony.
Mortgage interest deduction lowered
If you want to keep the marital home, the TCJA is also changing mortgage interest deductions. These are now capped at $750,000 instead of $1 million. Keeping the house may not provide you any tax benefits.
Child tax credit increased
There is good news if you have children. The child tax credit has doubled from $1,000 to $2,000 per child. This is only available to people who earn $200,000 or less, or couples that earn less than $400,000. For those earning under that cap, it does provide a substantial benefit, particularly for a newly divorced parent.
You may be unsure whether spousal support or another type of payment makes more financial sense. A family law attorney can evaluate your situation and help you determine the wisest course of action. He or she will also ensure you get what is fair, as you begin your new life.