By Attorney Tracey Goyette Cote, Director/Shareholder and Chair of the Domestic Relations Group
As of January 1, the newly enacted Tax Cuts and Jobs Act took effect and that means many New Hampshire families will be directly affected.
In late December 2017, Congress passed a large-scale tax reform bill known as The Tax Cuts and Jobs Act (the “Act”). President Trump signed the Act into law on December 22, 2017. The Act changed the tax laws in several ways that will directly impact divorce and family law clients, including divorced parents, unmarried parents of minor children, and couples in the process of divorcing. The Act makes significant changes to provisions of the Internal Revenue Code governing personal exemptions, the child tax credit, and alimony.
Personal Exemptions: For taxable years beginning after December 31, 2017, and before January 1, 2026, the Act eliminates personal exemptions for the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependent children. In the absence of further action by Congress, personal exemptions will again be available after 2025. Given the uncertain status of personal exemptions after 2025, it may be wise for parents with young children to address the allocation of exemptions in their divorce or parenting decree.
For parents who divorced before December 31, 2017, the allocation of exemptions for minor children was likely a negotiated term, taking into consideration other financial agreements in the divorce and tax benefits available to each parent. It may be difficult, however, to determine the impact of losing the exemption for a minor child because of the numerous changes made by the Act, including changes to tax rates, the standard deduction and the child tax credit, and elimination of many deductions that were previously available,
Child Tax Credit: For taxable years 2018 through 2025, the child tax credit has been increased from $1,000 to $2,000. The phaseout threshold for the child tax credit has been increased substantially, from $75,000 for unmarried individuals to $200,000, making the credit available to many divorced individuals who were not previously eligible. The credit may be taken with respect to each “qualifying child” of the taxpayer. In general, a “qualifying child” of divorced parents is a child younger than 17, who receives more than one-half of his or her support from the parents, and who is in the custody of one or both parents for more than one-half of the calendar year. Eligibility for the tax credit is linked to the allocation of dependency exemptions. Therefore, while the dependency exemption is not presently available, it may be advisable to allocate exemptions for dependents in the divorce decree.
Alimony: For divorce decrees executed after December 31, 2018, alimony is no longer deductible by the paying spouse and is no longer includable in the income of the recipient spouse. That means alimony payments will no longer offer the paying spouse any opportunity for tax savings. Conversely, the recipient will have the full benefit of every dollar received as alimony, without reduction for taxes. For divorce decrees executed before December 31, 2018, alimony remains deductible by the payor and includible in the income of the recipient, even after the new rules take effect. For modifications of divorce decrees originally executed before December 31, 2018, the new rules apply only if the modification expressly provides for their application. The changes in the law should be carefully considered in establishing alimony awards.
The Tax Cuts and Jobs Act makes significant changes to the tax laws affecting individuals, including divorce and family law clients. If you have questions about how the changes in the tax law may apply in your divorce, or whether changes in the tax law should result in a modification of your divorce decree, please contact any lawyer in the divorce and family law group at Shaheen & Gordon.
Contact a member of our Divorce & Family Law Team at 603-225-7262