The new federal tax law passed late last year will have a major impact on spousal and child support. Addressing these divorce changes to long-standing tax laws will have a major impact on divorce negotiations and litigation as a result.
The new law takes away the traditional personal and dependent exemptions. Claiming a head of household status will become important because the new tax law raises the standard deduction from $6,350 in 2017 to $12,000 in 2018; $9,350 to $18,000 for head of household filers and from $12,700 for married filing jointly filers to $24,000.
A parent with this status may be also be eligible for a larger $2,000 child tax credit for each child. This includes a refundable $1,400 for taxpayers, which reduces income taxes. A tax payer must be unmarried, pay over 50 percent of household expenses and have a dependent who lived in the household over half of the time to claim head of household status. Only one parent can claim this status if the couple has one child.
The child tax credit and head of household status will likely become an important part of negotiations, because these increase the after-tax income of their recipients. However, the IRS must publish a regulation before the child tax credit and its advantages may be traded. Parents may agree that it may be traded once it is legally permitted and, in the meantime, divide the tax credit’s economic benefit.
The new tax law will also impact a spousal agreement executed after January 1, 2019 because this support will not be deductible to the payer and taxable as income to its recipient spouse. This will eliminate the financial benefits to the family where a higher-income spouse and a lower-income recipient could reach an agreement that would allow more transfer of money to family members.
Even though recipients will pay lower taxes, the financial advantages to the payer of alimony are eliminated, which may reduce the amount of this support. This change will take effect on January 1 and will play a role in the timing of settlement negotiations taking place in 2018.