Coming in at more than 1,000 pages, the 2017 Tax Cuts and Jobs Act, like any piece of big legislation today, includes hundreds of small changes to the tax code whose effects will fly under the radar for most people. But how will it affect the practice of family law in Texas? For the most part, there are no dramatic changes– except when it comes to alimony.
Arguably the most important change is how the tax code will treat alimony, beginning in 2019. Currently, alimony payments offer an above-the-line deduction to the payor and are taxable as income to the recipient. This deduction effectively allows the income of the paying party (typically the higher earner) to receive a tax deduction for the alimony payments made. Under the new law, however, the payor will not receive a deduction for payments, and the recipient will not have to include the payments as income.
The reason this change matters is because alimony has become an important tool in the settlement process. Whereas most divorces become a zero-sum game (that is, whatever one party gets, the other party necessarily loses), alimony has been able to offer a rare net-benefit in structuring a settlement. For example, if one spouse’s earnings fall into the 37 percent income bracket, and the other spouse’s earnings fall into the 22 percent bracket, a settlement involving alimony payments may be useful. Such a couple might normally consider making a disproportionate division of the estate, giving more of the assets to the spouse with lower earnings. By using alimony, however, the settlement can be structured with a more even division of assets up front and a series of alimony payments from the higher-earner to the lower-earner over a number of years. Each of those payments will be deducted by the payor spouse at a 37 percent bracket and then reported as income tax by the payee spouse who would pay 22 percent. By giving the deduction to the spouse in a higher earning bracket—and passing the income to the lower-earning spouse—the overall tax burden on the income between the two ex-spouses can be lowered.
“Alimony has become an important tool in the settlement process.”
It is important to know that the alimony deduction will only be eliminated for those divorce decrees, separation agreements, and alimony modifications that are entered into after 2018. So if alimony payments are the right tool for your situation, you have until December 31, 2018 to take advantage of the deduction before it disappears.
Another important but little discussed change involves 529 plans. Formerly, funds placed in a 529 qualified tuition program could be used to pay tuition and costs for higher education only. The new tax bill, however, allows 529 plans to pay for up to $10,000 per year in qualified expenses—such as tuition, books, and room and board—for elementary and secondary school.
The new tax bill has also greatly increased the Child Tax Credit as well by making it available to a larger percentage of the population. Whereas the tax credit was $1,000 for each child under 17, that has now been doubled to $2,000 per child under 17, provided the child has a social security number. And whereas the credit phased out at $75,000 adjusted gross income for single filers and $110,000 for married filing jointly, those phaseout limits are now $200,000 and $400,000 respectively.
Finally, there are some other miscellaneous provisions to be aware of. The new tax bill lowered the mortgage interest deduction. Previously, a taxpayer could deduct interest payments on up to $1 million of acquisition indebtedness and up to $100,000 on home equity loans (from either the primary residence or a qualified secondary residence). Under the new tax law, however, the deduction on interest payments has been limited to $750,000 for acquisition indebtedness and has been eliminated entirely for home equity loans. The new tax law has also increased the standard deduction for single filers which will help ease the tax burden on newly divorced individuals. Previously, single taxpayers could claim a standard deduction of $6,350 and married couples could claim a standard deduction of $12,700. The new tax law has increased the standard deduction for those groups to $12,000 and $24,000, respectively.