Following the December 2017 passage of the “Tax Cuts & Jobs Act”, we now have new tax laws in place – sort of. The law designed to “simplify” the tax code is over 500 pages. It was hastily drafted and hastily passed. The truth is that no one really knows yet what is in it, or (especially) what its impact will be. There will likely be conflicts discovered within the provisions, and much legislative and regulatory action will be needed to figure it all out. Divorcing taxpayers are not the only ones affected, but they are affected in many ways. A noteworthy change is that alimony payors will no longer be able to deduct their payments for orders entered after 2018. The ability to do so and to shift taxes to the lower income recipient has been an important benefit for many divorcing families. Without this option, more money will go to the government and less will be available for families.
Additionally, tax brackets are changing (at least temporarily) for everyone. This is supposed to result in lower taxes. Many significant deductions have been eliminated, however, including moving expenses, tax preparation fees, home office expenses, union dues, and bad business debt. The deduction for state and local taxes is capped at $10,000 for both income and property taxes. This impacts real estate taxes, limits mortgage deductions, and, for Massachusetts taxpayers who pay state income tax and may have higher property values, may significantly counter the benefits from reduced tax brackets. The Affordable Care Act’s individual mandate is repealed, and personal exemptions are eliminated. For taxpayers who own businesses or work for businesses, there are other changes to tax brackets and deductions which can affect the bottom line for businesses, owners, and employees. When will we know more, and what should we do in the meanwhile?
It will undoubtedly take months, if not years, to figure out all the ramifications. New tax withholding tables have recently been introduced, which will help somewhat, but as noted, the lack of/limitations on some deductions will also be critical. Accountants and others are working diligently to help us figure it all out. Their assistance will be critical in assessing tax impacts and in helping taxpayers to plan accordingly.
From a tax standpoint, if you are in the middle of a divorce and you will be on the paying end, it is a good idea to wrap things up by December 31, 2018. On the other hand, if you will be on the receiving end, it may be wise to wait until 2019 to finalize your agreement.
Mediators and Collaborative practitioners will be able to assist clients in negotiating and/or adjusting support obligations to comply with new tax laws. This is not the time to go it alone.