THE Tax Cuts and Jobs Act, which was recently enacted into law, impact various issues in a divorce case. These changes are effective beginning 2018 through 2025.
Spousal upport. pousal Support will no longer be deductible by the paying spouse and will not be taxable income to the supported spouse for post 2017 divorce judgments and support orders. This will benefit the supported spouse in that the spousal support will be tax free income to the supported spouse. This does not affect existing orders and judgments for support entered prior to 2018. Prior to 2018, spousal support was tax deductible to the payor and taxable income to supported spouse.
Dependency xemptions. The new law suspends personal and dependency tax exemptions effective 2018. This is not favorable to the parent who has sole or primary physical custody of the child because under the law prior to 2018, that parent can claim the dependency exemption for the child in a divorce case. However, this loss may be offset by the higher standard deduction available for 2018 which is $24,000 for joint filers and $18,000 for heads of households.
Child and Family Tax Credit. Child tax credit is increased to $2,000 from $1,000 per qualifying child beginning 2018. This would benefit parents with sole or primary physical custody of the child. Further, up to $1,400 of the child tax credit can be refundable if it exceeds the parents’ tax liability. Prior to 2018, this credit was not refundable. However, the child tax credit begins to be phased out once the parents’ adjusted gross income reaches $200,000 or $400,000 for joint filers.
Mortgage Interest deduction. It is common among divorcing couple to buy the other party’s interest out of a community property home through refinancing. Beginning 2018, mortgage interest on loans used to acquire principal residence and a second home is only deductible up to $750,000 (down from $1 million prior to 2018) beginning with loans taken out in 2018. Further, interest on home equity loans are no longer tax deductible regardless of when the debt was taken out. This would be a disadvantage to the party keeping the community property home who typically would buy out the other spouse through a refinancing or home equity loan.
Estate and Gift Tax Exemption. The estate tax exemption was raised to $11.2 million per individual beginning 2018. Prior to 2018, the estate tax exemption was $5.49 million per individual. This is a major win for divorcing couples with significant assets. Couples with assets over $5.49 million would typically need to use both spouses’ estate tax credit totaling $10.98 in order to avoid paying estate taxes upon their death. The problem arises after a divorce when each spouse will be limited to $5.49 million. With the estate tax exemption raised at $11.2 million per individual, this would exempt 99% of divorcing couple from having to pay estate taxes in case of death.
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Please note that this article is not legal advice and is not intended as legal advice. The article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does create any attorney client relationship between you and the Law Offices of Kenneth U. Reyes, P.C. This article is not a solicitation.
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Attorney Kenneth Ursua Reyes is a Certified Family Law Specialist. He was President of the Philippine American Bar Association. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, P.C. is located at 3699 Wilshire Blvd., Suite 747, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail [email protected] or visit our website at Kenreyeslaw.com.
