With the arrival of 2019, the Tax Cut and Jobs Act have gone into full effect, which means that individuals and families filing for the tax year 2018 have to take into account the changes of the new law, as described in this article in U.S. News.
We have discussed before the most obvious change that impacts people considering divorce – the elimination of the deduction for payment of maintenance (also known as alimony or spousal support). Anyone who files this year will have to take into account this very significant change in the law that makes paying maintenance much more expensive.
Other tax changes however also have an impact, some positive and some negative.
The standard deduction is now $12,000, which could help individuals that do not itemize deductions. On the other hand, the dependent exemption has disappeared, which for large families could have a major effect. Also, the law now puts a cap of $10,000 on state and local tax deductions. In Missouri, where the tax burden is low and many people receive refunds, this could rebound negatively on the federal return.
The mortgage deduction has always been very valuable to families, but the cap is now $750,000. If you have a mortgage larger than that, you will have a lesser deduction.
Many itemized deductions have also been eliminated, including those for unreimbursed business expenses and tax preparation services, as well as moving expenses for job relocation.
Given these new changes in effect, if you are facing a divorce you have many new factors to consider. For example, should maintenance shift to a lower amount with an offset in more transfer of investments or retirement funds? Is it really still financially feasible to keep a large home mortgage if you lose a large amount of the interest deduction? Does the dependency deduction really matter anymore?
If you have questions about the impact of the new tax law on divorce, contact us – we can help.