Tax Cuts and Jobs Act: 'The New Federal Divorce Law'

Regina Snow Mandl, BridgeTower Media Newswires

I have never had a client who has said that he or she is getting divorced to take advantage of the tax laws. Divorce is an overwhelmingly difficult and often very painful personal experience, and while support and property division are factors, they generally are not what drives the decision to end a marriage.

Historically, divorce laws are shaped by the common and statutory laws of the states, and with only certain exceptions it is state law, not federal law, that is central.

The Tax Cuts and Jobs Act H.R.1, enacted on Dec. 22, 2017, has changed this dynamic in obvious and also some subtle ways, culminating in what one could call "The New Federal Divorce Law."

Although there is the perception that the primary purpose of the Tax Cuts and Jobs Act was to significantly reduce tax rates for businesses and simplify taxes for individuals, there is a category of individuals that is also greatly affected: divorced and divorcing couples.

The changes to the tax laws for this group are so profound that they require a re-examination of traditional concepts for family support and, as a result, asset division. These changes went into effect on Jan. 1, with the exception of the repeal of the alimony deduction, which will take effect after Dec. 31.

Unlike the change in the corporate tax rate, the tax law changes for individuals sunset in 2025. Most of the new tax laws that apply to individuals will expire Dec. 31, 2025, unless further legislation is enacted. The one exception is the expansion of 529 Plans, described below, which in part does not have an expiration date.

The Tax Cuts and Jobs Act is complex and lengthy, and I have no doubt that there will be much more discussion about its impact on family law in the future. To begin the conversation, I have selected the following five areas:

- Repeal of the alimony deduction, effective Dec. 31, 2018, and for all modifications to pre-existing divorce judgments if the modification expressly provides that alimony is not deductible by the payor or includible by the payee.

- Repeal of personal exemptions, effective Jan. 1, 2018, worth $4,050 per person in 2017.

- Doubling of the child care tax credit and substantial increases in the income limits for who can claim the credit. For taxpayers who pay no federal taxes, there is a credit of up to $1,400.

- Expansion of categories for distribution of 529 Plans, which can now be used for up to $10,000 per student per calendar year for attendance at a private or religious elementary or secondary school, and may also be applied to an ABLE program.

- Repeal of the interest deduction on a home equity line of credit or home equity loan, unless for purposes of acquisition or home improvement.

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Repeal of alimony deduction

Under current federal law, alimony payments are deductible from the gross income of the payor and taxable as income to the recipient.

The Tax Cuts and Jobs Act repealed the alimony deduction, so that it is no longer deductible from the gross income of the payor, nor is it taxable to the recipient.

The first version of the bill would have made the repeal of the alimony deduction effective as of Jan. 1, 2018, and would have applied to any modification made of any instrument executed before then if expressly provided for by such modification.

The earlier Summary of Section 1309 of the Tax Cuts and Jobs Act H.R. 1 stated that the considerations were: the provision would eliminate what is effectively a "divorce subsidy" in that a divorced couple can often achieve a better result than a married couple; and that the provision recognizes that spousal support should have the same tax treatment as within the context of a married couple.

The bill was eventually enacted repealing the alimony deduction, but the effective date was changed from Jan. 1, 2018, to Dec. 31, 2018. See Section 11051.

There will be a rush to finish divorce cases, either by trial or agreement, in order to lock in the alimony deduction before the end of 2018.

The effect of the deduction of the alimony repeal goes beyond the boundaries of the divorce cases themselves. The Tax Cuts and Jobs Act, in grandfathering pre-existing divorce agreements, refers to "divorce or separation instruments." Section 11051(a) (3)(C) defines a divorce or separation instrument as "(i) decree of divorce or separate maintenance or written instrument incident to such decrees, (ii) a written separation agreement, or (iii) a decree (not described in clause (i)) requiring a spouse to make payments for the support or maintenance of the other spouse."

What will happen to alimony provisions in existing pre-marital and post-marital agreements?

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Repeal of personal exemptions

Many divorce agreements have provisions for taking the personal exemptions for the children. This will no longer be available, even if in the agreement already.

However, as the repeal expires Dec. 31, 2025, it would be prudent to provide for the taking of personal exemptions for the children if, as and when they become available. See Section 11041.

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Child care tax credit

The child care tax credit has been increased from $1,000 to $2,000 per child per calendar year. The income limits for the parents have been dramatically increased from $75,000 to $200,000 for unmarried people, and from $110,000 to $400,000 for married taxpayers.

For taxpayers who pay no federal taxes, there is a credit of up to $1,400.

The suspension of the personal exemptions through 2025 does not affect which party is entitled to the child care tax credit. See Section 11022.

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529 Plans

529 Plans, which had been limited to savings for higher education expenses, can now be used for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school. Section 11032.529.

There is a cap of $10,000 per student per calendar year, from all plans combined. The expansion of the use of 529 Plans does not have an expiration date except for transfers to ABLE programs, which will expire at the end of 2025.

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Deduction of interest on home equity line of credit or loan

Sometimes parents will access the equity in their home to pay for a child's college education. Effective Jan. 1, 2018, the interest on a home equity line of credit (HELOC) or home equity loans will no longer be deductible, unless it is used for "acquisition purposes."

Acquisition purposes include improvements to the residence. The taxpayer will need to keep records to show whether the funds were used to improve the residence. Mortgage interest is still deductible; pre-existing mortgages (the old limit was $1 million) are grandfathered; new mortgages of up to $750,000 will have an interest deduction; and interest for refinanced mortgages up to the limits of the grandfather mortgage or the new limit will be allowed. See Section 11043.

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What to do now

Given that most of these changes expire in 2025, going forward it would be a good idea to have a tax clause in all new divorce cases that provides options should the law rewind to 2017.

While no one has a crystal ball as to what may be in store, it would be prudent to consider language in all agreements and proposed judgments that will minimize future disputes and the attendant legal costs.

This article was written to highlight five changes that I think will very likely affect divorce cases. However, keep in mind that there have been extensive changes in the federal tax laws (the new federal tax law is 278 pages long). Care should be given in every situation to evaluate how the new federal tax law will impact the property and support provisions in each particular case.

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Regina Snow Mandl specializes in family law, estate planning and administration, and probate litigation, with offices in Lincoln and Boston.

Published: Tue, Feb 27, 2018

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