Late last year, Congress and the President enacted sweeping new tax legislation that fundamentally affects the family both during marriage and following divorce. The Tax Cuts & Jobs Act (“TCJA”) made four key changes of which you should be immediately aware.
First, the TCJA made a major change affecting alimony (also known as maintenance). Based upon long established law enacted around the time of the Second World War, alimony/maintenance has been tax deductible to the paying spouse and taxable income to the recipient spouse. Effective with divorces entered on or after January 1, 2019, under the TCJA alimony/maintenance will no longer be tax deductible and will no longer be income subject to taxation. Individuals wishing to make maintenance/alimony tax deductible must complete the divorce in 2018. The costs of the deduction have been significant. In 2015, approximately 600,000 taxpayers claimed the alimony/maintenance deduction totaling $12.3 billion dollars on their tax returns. The Joint Committee on Taxation estimates that repealing the deduction will add $6.9 billion dollars in new revenue over 10 years.
Any prenuptial agreements that address maintenance and involve situations where the parties are not to be married in 2018 should be reviewed by a family attorney to determine what amendments may be needed to ensure that the parties’ intent regarding maintenance is met in light of the TCJA.
Second, effective immediately, the exemptions for dependents have been eliminated. However, since under the TCJA the standard deduction has been raised significantly and the tax rates have been lowered, it is not clear what effect this change will have on taxable income and the tax paid. Each individual should consult a tax professional to determine their proper withholding level in light of the TCJA.
Third, as noted previously, the TCJA has raised the standard deduction significantly ($12,000 for individuals filing a Single return, $18,000 for filing a Head of Household return, and $24,000 for taxpayers filing Married returns).
Fourth, the TCJA increases the child tax credit from $1,000 to $2,000 per qualifying child, with $1,400 being refundable. This credit is phased out for single filers with adjusted gross income that exceeds $200,000 and joint filers whose adjusted gross income exceeds $400,000.
Given the significant changes in tax law, you should consult family and tax counsel on how best to prepare to meet these changes. If you have any questions, please contact Marc Johannsen at 612.336.9302 to discuss your individual situation.