How the New Tax Cuts and Jobs Act (TCJA) Affects Your Divorce in Pennsylvania
The Tax Cuts and Jobs Act (TCJA) has significantly impacts individuals in the process of getting divorced in Pennsylvania as of January 1, 2019. Here are some of the major changes.
- Alimony - For divorce degrees entered on or after January 1, 2019, alimony is no longer a tax deduction for the payer and is no longer taxable to the recipient.
- Dependency exemption becomes $0 for 2018.
- Standard deduction is increased for married individuals filing a joint return, for head-of-household filers, and for single filers.
- Child tax credit is increased to $2,000 (subject to phase-out for higher earners) for tax years beginning after December 31, 2017 and before January 1, 2026.
Article Below By: Brett Dubin, CPA
The Tax Cuts and Jobs Act (TCJA) has a major impact on taxpayers who are in the process of getting divorced, including those in Pennsylvania. These changes impact many aspects of the tax code including itemized deductions, dependency exemptions, and tax credits.
Here are the key changes that most significantly impact families going through divorce.
Under the prior tax law, alimony payments to a former spouse were treated as a tax deduction for the payer and as income to the recipient. Beginning with divorce decrees entered on January 1, 2019, alimony can’t be deducted and is no longer taxable to the recipient.
The change in the tax treatment with respect to alimony may impact divorce negotiations and settlement, as the mutual tax benefit is eliminated. Couples going through the divorce process may want to finalize their case before the new tax law changes for alimony go into effect on January 1, 2019 to take advantage of any tax savings.
2. Dependency Exemptions
Under the prior tax law, taxpayers determined their taxable income by subtracting from their adjusted gross income any personal exemption deductions. Personal exemptions generally were allowed for the taxpayer, the taxpayer’s spouse, and any dependents (amount deductible for each personal exemption was $4,050 for 2017, subject to a phase-out for higher earners). This exemption becomes $0 for 2018, under the new tax law.
3. Standard Deductions
The loss of the dependency exemption is intended to be offset by higher standard deductions under the new tax law.
For tax years beginning after December 31, 2017, the standard deduction is increased to $24,000 for married individuals filing a joint return (previously $13,000), $18,000 for head-of-household filers (previously $9,550), and $12,000 for single filers (previously $6,500).
4. Home Mortgage Interest
The home mortgage interest deduction may be an important issue in a divorce. Since the standard deduction has been raised to $18,000 for head-of-household filers and $12,000 for single filers, the benefit of the home mortgage interest deduction may be eliminated unless the amount of the interest paid and other itemized deductions exceed the standard deduction.
5. Child Tax Credit
Under the prior tax law, a taxpayer could claim a child tax credit of up to $1,000 per qualifying child under the age of 17 (subject to a phase-out for higher earners). To the extent that the credit exceeds a taxpayer’s liability, a taxpayer is eligible for a refundable credit.
For tax years beginning after December 31, 2017 and before January 1, 2026, the child tax credit is increased to $2,000 (subject to a phase-out for higher earners). In addition, a $500 non-refundable credit is provided for certain non-child dependents. The amount that is refundable is increased to $1,400 per qualifying child for 2018.
The child must be claimed as a dependent on your tax return to claim the child tax credit. In order for the non-custodial parent to claim the child as a dependent, IRS Form 8332 needs to be signed and completed by the custodial parent.
Overall, the new tax reform will have a significant impact on families going through divorce in 2018. The new tax reform bill may make it more challenging to settle a divorce case. It is important to seek the proper legal and tax professional guidance to navigate the new tax law landscape in 2018 and beyond.