The impact of new tax law on divorcing couples
On Dec. 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. This law brought about significant tax changes, some of which took effect almost immediately. Other provisions of the act did not become effective until 2019, and are just now having an impact on divorcing couples.
One of the most significant tax changes is that maintenance (alimony) payments are no longer tax-deductible (people divorced prior to Jan. 1, 2019, are allowed to continue to deduct maintenance). This change has a more significant impact on individuals in higher tax brackets because they no longer have the ability to shift income to their former spouse in a lower tax bracket via maintenance, thus lowering the overall amount of taxes paid by both spouses.
Also, effective Jan. 1, the formula for calculating maintenance changed. Before the act became effective, maintenance was calculated based upon the gross income of both parties. With these tax law changes, the Illinois legislature had to account for the fact that maintenance is no longer tax deductible; thus, the Illinois Marriage and Dissolution of Marriage Act was modified effective Jan. 1 to calculate maintenance using net income instead of gross income. Using net income instead of gross will have a more significant impact on divorcing families with a high-income wage earner.
When the act took effect, the value of dependency exemptions was eliminated, but the child tax credit remains available, and in fact increases from $1,000 to $2,000 on each qualifying child younger than age 17. The child tax credit can only be claimed by a parent who is entitled to claim the child as a dependent, thus allocation of the right to claim the child as a dependent remains relevant.
The act will undoubtedly impact settlement negotiations, making divorce cases more complicated. Individuals going through a divorce should work collaboratively with their lawyer and financial professionals (financial advisers, accountants/CPAs, etc.) to ensure everyone is on the same page regarding a client's short- and long-term financial goals.
Considerations such as support obligations, asset allocations, tax implications of assets and valuation of the assets are all divorce-related decisions that should be discussed. Other topics to examine include the calculation of income, a party's eligible business deductions, capital gains taxes, real estate tax deductions, child-care credits, valuation of investments, timing of a divorce, future earning capacity, business valuation and retirement objectives.
People who already have divorce-related agreements (e.g. prenuptial/postnuptial) should review their existing agreements with their accountants and financial advisers to determine whether changes in the tax laws impact the intent or operation of their agreement(s). For example, a prenuptial agreement may include a maintenance formula based on the presumption that maintenance would be taxable in the event of divorce. Because maintenance is no longer tax deductible as of 2019 (unless the divorce was finalized prior to 2019), the terms of the prenuptial agreement may be impacted.
Whether you like the changes in the tax law or not, they are likely to impact anyone considering a divorce or prenuptial agreement, anyone going through a divorce, or even those who already have divorce-related agreements or judgments.
Consulting with a divorce attorney is important to understanding how the Tax Cuts and Jobs Act of 2017 and resulting Illinois statutory changes will impact your individual situation.
• Ilene B. Goldstein is a principal with the firm of Katz, Goldstein & Warren concentrating her practice in the areas of matrimonial and family law since 1985. She has been an active trial attorney and handles divorce cases involving complex financial matters, including business and real estate valuation.