Family Law and the 2017 Tax Act
The 2017 Tax Act (formally, the Tax Cuts and Jobs Act) will have indirect and direct impacts in family law cases. The following (except alimony) are effective January 1, 2018.
1. Tax Rates:
Most tax brackets have been reduced and the income range within each tax bracket has been widened, so effectively almost all taxpayers will have a lower tax rate. The categories of taxpayers (Single, Head of Household (HOH), Married Filing Separate (MFS) and Joint (MFJ)) have been retained. However, the rate differential has narrowed and, beginning at taxable income of $82,500, the tax rates are the same for each category except joint. This means that single, married separate and head of household taxable income over $82,500 is taxed exactly the same. Below that amount, single and married separate have exactly the same level of tax; head of household would have up to $1,392 less in tax.
2. Deductions- Standard:
In an attempt to simplify the tax return process (and an offset for the loss of itemized deductions and personal exemptions), the standard deduction was increased to $12,000 per person for Single and Married, Separate filers. However, Head of Household filers can claim $18,000 as a standard deduction. Bear in mind that this $6,000 translates into tax savings of between $600 to $1,920 depending on the person’s tax rates (this applies for taxpayers with taxable income up to $200,000; presumably over this amount the taxpayer would have itemized deductions and the standard deduction would not apply).
3. Head of Household versus Tax Exemptions (Tax Credit):
This gets a little confusing.
Filing status is determined by the factual determination of an unmarried taxpayer who maintains a household for a qualifying child who spends more than 50% of his/her time with that parent. That parent is entitled to file as Head of Household and to claim the child as a dependent.
However, the parent can assign his/her right to claim the child as a dependent to the other parent.
Effective 2018, the dollar amounts of dependency exemptions (for children, individuals and other miscellaneous family members) are zero.
However, the child tax credit (CTC) is available for children under the age of 17 to the parent who has the right to claim an exemption for the child. Thus, one parent could claim Head of House status (and the larger standard deduction and lower tax rate) and the other parent can claim the tax credit.
The CTC is up to $2,000 per child. This is a credit, i.e. applies dollar for dollar against the tax. The CTC is reduced (“phased out” in tax jargon) at upper income limits. For a single individual, the CTC begins to phase out at $200,000 at the rate of $50 per $1,000 of income so, for one child; it is gone at $240,000. For joint taxpayers, the threshold is doubled to $400,000.
Finally, the CTC is “refundable” for the credit not absorbed by the tax liability up to $1,400 per child and will be paid by the government, i.e. not really refunded, but essentially paid as a stipend. The maximum refundable portion is calculated based on earned income.
Partial credit: A credit of $500 is allowed for each “Qualifying Relative”; generally this is a dependent that is not a qualifying dependent for the CTC. This includes otherwise qualifying children 17 and over, college students under age 24, disabled children of any age, parents and other relatives.
Finally, the parent who qualifies for the Child Tax Credit also qualifies for any education tax credits.
4. The Elephant In The Closet Waiting To Come Into The Room:
One of the more interesting provisions of the new Tax Act is that the deduction for alimony will be eliminated. The alimony provision is repealed for “any divorce or separation instrument (as defined in Section 71 (b) (2)) executed after December 31, 2018.”
Section 71 (b) (2) (A)) defines “a divorce or separation instrument” as a “decree of divorce or separate maintenance or a written instrument incident to such a decree” (ii). There are no Regulations or other guidance from the Internal Revenue Service at this point. Presumably, the minimum requirement is a judge’s signature. In New Hampshire, a divorce decree is final 30 days after the date on the clerk’s notice of decision. It is possible (but unlikely) that this later date will be the effective date. It is clear that cases pending on December 31, 2018 (but not finalized with a decree) would be under the new law disallowing the alimony deduction.
A separate issue is post December 31, 2018 modifications of divorce decrees. The effective date language states that if the original decree was before January 1, 2019 and the modification does not expressly state that new law applies, then the old law will apply (i.e., alimony is deductible). Thus, alimony paid in 2020 under a 2019 modification will still be deductible.
i Adapted from an article in Bar News for February 21, 2018 published by the New Hampshire Bar Association
ii There is also a provision for a written separation agreement or an alimony decree not described in A
2018.9.20 Tax Blog – Family Law and the New Tax Act