This month we are continuing our series on the new TCJA and how it impacts divorce…
Filing Status Categories
The new tax law keeps the current five filing “statuses” in place. They are currently:
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow/er with dependent child
Child Tax Credits and Standard Deductions
Under the new tax law, deductions for individual exemptions for the individual, spouse and dependents have been eliminated through 2025. Those are currently valued at $4,050. In exchange, the child tax credit will double from the current amount of $1,000 to $2,000. For divorcing couples, that could reduce the fight over which parent is allowed to claim the child as a dependent. The intent of the new law is to offset the loss on individual exemptions and replace it with a higher standardized deduction amount.
Interest on Home Mortgages and Lines of Credit
Unless the amount of interest on your home mortgage (and other itemized deductions) is more than the standard deduction, this benefit goes away. Beginning in 2019, the amount of the standard deduction INCREASES from $12,000 for single filers to $18,000 for Head of Household filers. This increase eliminates the need for many filers to itemize deductions.
Mortgages issued prior to November 15, 2017 are grandfathered in for mortgage interest deductions. This includes the re-financing of existing mortgages. In divorce, most couples refinance the marital property into the name of the spouse that is keeping the marital home. In this case, the mortgage company will likely view this as a new loan and the “grandfathered” status could be lost.
If you took out a home equity line of credit after December 15, 2017, that deduction has also been eliminated until 2025.
Medical Expenses
For 2018, medical expenses in excess of 7.5% of adjusted gross income (AGI) are deductible as an itemized deduction. This issue could come up in divorce negotiations when the parties are deciding who will be responsible for medical expenses. This decision, in turn, impacts itemized deductions claimed by each party. Remember, itemized deductions must be in excess of the new (higher) standardized deduction in order to be deducted. Identifying the spouse or parent who will be responsible for medical expenses is required in most states, either in the Permanent Parenting Plan or in the Marital Dissolution Agreement.
Tax Advice
The new tax laws can have a significant impact on divorcing couples and the attorneys that represent them. With the completely new tax law, it is recommended that all filers consult with a tax professional, especially the first year after their divorce. The deductibility of alimony, the elimination of dependent deductions, the deductibility of medical expenses and the deductibility of home equity interest will all have an impact on the settlements created by divorcing spouses with their divorce mediator or attorney. If you go to court, the decisions handed down by judges just got a lot more complex.