The Recently Enacted Tax Cuts and Jobs Act and How It Affects Divorce
As most people know, Congress enacted and the President signed into law the Tax Cuts and Jobs Act approximately a month and a half ago. Although most of the meat-and-potatoes of the Act relates to tax rates for both individuals and corporations, there are also provisions contained within the Act that affect divorcing couples and thus family court attorneys.
Repeal of Alimony Deduction
Effective December 31, 2018, alimony will no longer be deductible by payor and includable as income by recipient. There is some debate about the rationale behind this provision contained with the Act, but some evidence points to the fact that the government wished to eliminate the so-called “divorce subsidy” in which a divorced couple can often achieve a better result than a married couple. A divorced couple will file separate tax returns post-divorce and the payor will obtain a deduction related to his tax bracket which is normally higher than the recipient’s tax bracket and the recipient will receive as taxable income the alimony payments and be taxed at a lower tax rate on those monies. A married couple cannot take advantage of this subsidy.
Because the Act becomes effective on January 1, 2019, and because both Massachusetts and Rhode Island have a 90-day Divorce Nisi period, a great many clients who have alimony exposure in their present divorces are interested in reaching final settlement prior to September 30, 2018. The Probate and Family Court in Massachusetts and the Family Court in Rhode Island can therefore expect an increase in traffic of settled cases in August and September 2018 in order to secure the alimony deduction before the end of 2018.
What if you have prenuptial or postnuptial agreement with typical tax language contained within it and you attempt to enforce that prenuptial or postnuptial Agreements after December 31, 2018? Who knows. The IRS has not yet given guidance on this.
Repeal of Dependency Exemptions
The Act repealed personal income tax exemptions starting tax year 2018. The 2017 tax returns still have those exemptions. As most divorce practitioners know, the award of personal tax dependency exemptions as it relates to children can be a contentious area in trying to finalize a divorce. The Act repealed the personal exemptions, and even if you have pre-existing divorce judgments/separation agreements, the IRS will no longer recognize personal exemptions and, in fact, you will notice on the 2018 tax returns that there will not even be a place in which to take them. It should, however, be noted that, as with a lot of the provisions contained within the Act, the repeal of the personal exemptions expires December 31, 2025. Therefore, if the divorcing couple has young children, it may still be a good idea to include language regarding which party takes which child for personal exemptions if and when they become available.
Child Care Tax Credit
The Child Care Tax Credit has been increased from $1,000 to $2,000 per child per calendar year, and the income limits for parents have been increased from $75,000 to $200,000 for unmarried couples and from $110,000 to $400,000 for married couples.
It would therefore appear to be prudent to write into Settlement Agreements both a provision regarding personal exemptions (just in case) and to write in separately the provisions related to which party takes the child care credit and for what year or years.
What will the alimony landscape look like starting January 1, 2019? Without tax considerations, will the formula-based Alimony Reform Act of Massachusetts still apply? Will the rehabilitative nature of the Rhode Island alimony award still apply if the payor/spouse cannot deduct his payments? Ultimately, spousal support is just what it sounds like, that is, support based upon the need of recipient and the ability to pay of the payor. The tax deductibility of those payments has always made alimony somewhat more palatable, but without those, a real question arises as to how many payor/spouses will be willing to pay alimony voluntarily and what type of judicial discretion will be used by Judges when ordering alimony payments.
If you have questions about this change in the law and need guidance, call Keough and Sweeney 401-724-3600 for an appointment to meet with us at one of our office locations. We have a Rhode Island location in Pawtucket that is convenient for residents of Providence, Warwick, Cranston, and all areas of the state. Our Raynham office is located near Taunton, Dighton, Somerset, Easton, and Bridgewater. For our Boston clients, we also have an office located in the financial district.
