In 2017, the federal Tax Cuts and Jobs Act (TCJA) amended the tax code and made sweeping changes. Some of these changes significantly altered the taxation treatment of alimony and child support. Here is what you need to know about the new tax laws, alimony, and child support and how it may impact you:
Alimony and Child Support Today
Currently, an individual who is court-ordered to pay spousal maintenance or alimony is permitted to deduct their payments from their federal taxable income. The recipient is required to pay taxes on these amounts. Child support, however, is not a deductible expense for the paying parent and the receiving parent is not required to report the funds as income.
Under the TCJA alimony (maintenance) and child support will be treated the same. This means that the party who is paying alimony will not be allowed to deduct these payments from their taxable income and the recipient will no longer owe taxes on the funds they receive. However, this change will not apply to alimony orders which are already in existence or become final by December 31, 2018. Additionally, if the parties want to modify their pre-2019 alimony orders after December 31, 2018, they will not be subject to the new law unless they expressly state that they want this provision to apply to their modified order.
The TCJA’s change to the alimony deduction will probably affect how parties consider and structure their maintenance agreements. Alimony is not guaranteed and is usually negotiated by the parties. Prior to the change to the tax code, the available tax deduction may have been an incentive for a spouse to agree to pay alimony amount rather than litigate. Now, potentially obligated spouses may not be as inclined to agree to pay maintenance or may want to pay a lower amount since they can no longer offset their costs.
Personal and Dependent Exemptions
A personal exemption is an amount a taxpayer can deduct from their taxable income for themselves on their return. The dependent exemption allows a taxpayer to also exclude income from their taxable income for each dependent (usually their children). Before the TCJA, the law allowed an exemption of $4,050 per person up to a certain adjusted gross income amount. However, effective January 1, 2018, both the personal and dependent exemptions were eliminated. This change impacts both past and future child support orders. Before, child support orders and agreements typically included a provision which identified the parent who could claim their child as a dependent on their tax return. Being able to claim this exemption meant significant tax savings. Consequently, the inclusion of this term was usually due to negotiation between the parties. Now, this carefully crafted term is essentially meaningless as neither parent can claim their children under the exemption.
The overall impact of the repeal of the personal and dependent exemptions on individual parents is difficult to gage. However, the TCJA did make other changes which may help mitigate the loss of these exemptions. For instance, the TCJA has raised the standard deduction and child tax credit significantly. These and other tax amendments may ultimately help parents in certain situations.
At the Draper Firm, we have experience assisting clients in making decisions concerning alimony and child support which are in their best interest and can provide you with insight into how the tax code changes may affect you. Contact us today to schedule a free consultation.