Alimony, Child Care and Selling Your Home: How the New Tax Plan Affects Divorcing Couples

The President recently signed the new tax plan into law. Most of the news coverage has focused on state and local tax, or SALT, deductions, the new corporate tax rate, and the increase in the deficit. However, there are some specific parts of the new law that will affect couples seeking a divorce, as well as those whose marriages have already ended. We wanted to address a few of those issues here, so that you know what you might be facing for the coming year.

Please note that these changes will not go into effect until 2019. If you are in the process of getting a divorce, you may want to aim for finalizing it no later than December 31, 2018, if you can.

Alimony payments will no longer be tax deductible

Under the current laws, the spouse who pays alimony can deduct that amount from his or her overall income. The spouse who receives alimony has to list it as income, but because the receiver is likely in a lower tax bracket, the amount of money subject to taxes is lower as well.

For example: Bob pays his ex-wife Jane $40,000 a year in alimony, which he can deduct. He is currently taxed at 24% by the federal government. That deduction saved Bob $9,600.

Jane, however, earns much less money than Bob does, and is therefore taxed at 15%. That means she has to pay 15% of that $40,000 in alimony – about $6,000. Between the two of them, they saved $3,600 in taxes – a nice chunk of change.

Under the new tax plan, Bob can no longer deduct alimony, and Jane no longer has to pay taxes on it. This might sound good for Jane, but it is terrible for Bob – and a real monkey wrench for couples looking to finalize their divorce decrees.

In the past, many spouses were more willing to pay alimony, and to pay higher amounts in alimony, because of the tax deduction. Under the new plan, that incentive is gone, which means lower-earning spouses will have to fight much harder to obtain the spousal support they need to transition to their new lives.

You may not be able to claim the entirety of your mortgage debt

If you already own your home, you are grandfathered in, in terms of deductions. However, if you plan on purchasing a new home in 2019, you may only claim up to $750,000 in mortgage debt. According to one source, Rockville is the most expensive place to live in Maryland, with a housing index of almost 2.5 times that of the rest of the country.

You may pay more money when you sell your home, too. The new law keeps the capital gain tax in place for couples who sell their home at $500,00 for joint/ $250,000 for single filers, so long as it is your primary residence, and you have lived there for at least two of the last five years. However, you can no longer deduct moving expenses or your tax preparation. And with the rising cost of home prices, you may end up selling the family home for more than you expected. Normally, buying low and selling high is the preferred option, but it could hurt your tax payments come 2019.

The good news is, the child tax credit has been expanded

If you are a single parent making up to $200,000 a year, you can now claim a $2,000 tax credit for every child in your home who is under the age of 17. There is also a $500 temporary credit for non-child dependents, such as your elderly parents, your kids over the age of 17, family members you support with disabilities, etc.

The new tax plan will likely have long-reaching repercussions than any of us can anticipate at this time. If you are worried about the effects the new rules will have on your divorce proceedings, or on any existing agreements you might have, the Rockville divorce attorneys of McCabe Russell, PA are here to help. To reserve a consultation time, please call 443-812-1435 or fill out our contact form. We also maintain offices in Columbia, Bethesda and Fulton.