In January, the new federal tax laws went into effect. These laws include changes that will impact how the tax code treats a divorce settlement.
As it relates to divorce settlements, the most significant change to the tax code involves maintenance (alimony) payments. Since 1942, spouses paying alimony have been able to write-off those payments as a tax deduction and the spouses receiving the payments have had to report the alimony as income. However, the new tax code changes how alimony is treated significantly.
Starting in 2019, alimony payments will no longer be tax-deductible and the payments will no longer be treated as income in a tax filing. It is important to note that these changes do not impact those who divorced or legally separated before Jan. 1, 2019. Those couples that are considering a divorce but haven’t yet finalized their agreements might feel compelled to act before the new alimony tax laws go into effect in 2019.
Other changes to the tax code that may impact divorced couples include:
- Increase of the standard deduction for single tax payers to $12,000 and for those married and filing jointly to $24,000.
- Doubling of the child tax credit to $2,000.
- New $10,000 limit on the deduction for state and local taxes, which includes property and state income taxes.
- Reduction, with some exceptions, of the mortgage debt limit for home mortgage interest deductions to $750,000 for couples filing jointly and $375,000 for persons filing individually.
- Elimination of the deduction for interest on home equity loans through 2025.
- Elimination of the moving expense deduction, with some military members excepted.
- Increase in the Alternative Minimum Tax exemption for singles and heads of household to $70,300.
- Doubling of the gift and estate tax exemption.
Before finalizing a divorce settlement, it may be wise to consult a CPA or other tax professional to assess the impact of the tax changes on any potential settlement. As a CPA, Michael Craven is uniquely positioned to help clients navigate the negotiation of a divorce settlement while also taking into account the tax implications of that settlement.
