Tax Bill Affects Divorce
They say that two things are certain, death and taxes. Another thing that is certain is that nearly half of Texas marriages end in divorce. If you are heading for divorce or are already getting divorced, you need to consider all the tax implications, particularly in light of the new 2017 Tax Bill.
Taxes are Inevitable; Losing Money Isn’t
In divorce court or in mediation rooms, allocating the tax benefits should be a part, even a significant part of the negotiation process. Our experience is that many attorneys never address this issue and therefore their clients often leave a lot of money on the table. Following are twp examples of how changes in tax laws affect a sample family. Understanding tax benefits is an important part of a divorce settlement.
Personal Exemptions and Child Tax Credits
In the Past
2017 tax tables show that each family had a standard deduction of $12,700. In addition, they could take a personal exemption of $4,050 for the taxpayer, a spouse, and each qualifying child. Therefore, a family consisting of one wage-earner, a spouse and two children would get $12,700 for the standard deduction plus four personal exemptions totaling $16,200 for a total of $28,900. The also received a child tax credit of $1000 per child under age 17.
Under previous tax law the family would deduct their personal exemptions of $28,900 from their income, leaving taxable income of $29,100. They would then calculate their taxes using the IRS tax tables and see that they had a tax of $3,436. They would reduce their taxes by the credit for their two children under age 17 ($2,000) and pay $1,436 in taxes. This results in them paying about 2.5 percent of their income in taxes.
Under the New Tax Bill
The standard deduction almost doubled to $24,000. The personal exemptions have been eliminated. Our sample family still has $58,000 in income, but they will take the new standard deduction of $24,000. They no longer have any personal exemptions so they will use the tax tables to calculate their tax on the remaining $34,000. A tax return for a married couple filing jointly provides that the tax on this income would be $3,699. They would then take the enhanced child tax credit of $4,000, effectively eliminating their taxes. (Some taxpayers will be able to get a refund on the child tax credit, but that is not a subject of this article.)
Depending on your income, investments, and other circumstances, your results may vary greatly. Please note: The child credit income limit is $400,000 Married Filing Jointly and $200,000 Single.
How to Save Tax Dollars in Your Divorce
In our firm, we pay attention to the tax implications of your decisions. For example, we look at the tax effects of alimony payments. We look at the tax effects of dividing tax-affected accounts such as IRAs and 401(k)s. And in this case, we would look at the tax effects of family related deductions and exemptions.
For example, assume that there is a divorcing couple with two children. After the divorce, one spouse may be in a low tax bracket and the other in a high one. If the children live primarily with the lower income earner, it wastes the tax credits. However, the parties can agree to allocate those to the high-income spouse. This could result in several thousand dollars each year of benefit. The parties can negotiate a way to put funds in both pockets.
This is the second of three articles on taxes and their affect on family law. The first two articles discuss the tax bill passed by congress and signed by the president in December 2017. Most changes in the tax bill take place January 1, 2018, but some are effective later. The first article addressed the changes to alimony deductions. This one addresses the changes to the personal exemptions and the child tax credit. The next tax article will address the tax implications of capital gains and dividing tax-advantaged investment plans in a divorce.