The recently passed federal tax legislation raised questions and concerns for many people. The final word is still out on the implications, but here are a few observations about how the changes might come into play in the kind of family law issues that I help my clients navigate on a daily basis.*
Alimony taxation and deductibility: OUT.
Starting in 2019, alimony will no longer be deductible to the individual paying alimony, nor will it be taxable to the receiver. However, divorced or separated couples who want to modify settlement agreements created on or before December 31, 2018 may continue to follow the 2017 tax rules, as long as they specify that in their new agreements. It seems likely that the lack of deductibility will make alimony less appealing to the payor and more so to the payee. One option may be for divorcing couples to adjust for this change by reducing the amount of alimony to be paid (and/or increasing child support instead).
Penalty for Affordable Care Act: OUT. Higher health insurance premiums: Probably IN.
The penalty for Affordable Care Act was eliminated. As a result, experts have predicted that health insurance premiums may rise for individuals who purchase their health insurance outside of employment. The cost of health insurance is one of the biggest reasons I have seen divorcing individuals need alimony upon divorce. This has been especially true for older women who are unemployed and/or have been relying on their spouse’s health insurance. Because of this, it is especially important to understand the cost of health insurance when calculating the need for alimony.
Child tax exemptions: OUT. Child tax credits: IN.
Personal tax exemptions for children are eliminated in the new tax law. The good news is that the new tax law doubles the child tax credit from $1,000 per child to $2,000 per child. A tax credit is applied whether the payer owes tax or not, whereas an exemption is a set-off against a parent’s income. Furthermore, up to $1,400 of the credit is actually refundable to the taxpayer.
529 account use for private school: IN.
Parents will be able to withdraw up to $10,000 annually per child from 529 accounts to pay for private school with the same tax benefits previously reserved for college expenses. Also, families with disabled children will be able to roll their 529 funds into ABLE accounts.
Mortgage interest deduction: IN, but reduced. Line of credit interest deduction: OUT.
Under the new law, individuals will no longer be able to deduct the interest paid on a line of credit or a home equity line of credit. They will still be able to deduct the interest paid on their mortgage debt, but the cap of $1,000,000 has been reduced to $750,000. The cap includes the mortgage on a primary home and one other “qualified residence.”
Of course, the new tax law contains other provisions that may affect individuals and businesses. This list touches on just a fraction of the important changes which can impact family law issues. If you are contemplating separation, divorce, or a modification of your child support or alimony, I can help you understand your rights. You can reach me by e-mail at firstname.lastname@example.org or by phone at (240) 778-2304.
*McMillan Metro, P.C. and Lisa Seltzer Becker are not accountants. None of the information or observations contained in this article are intended to be tax advice or legal advice.