As you may have heard, Congress will likely be voting on major changes to the tax code this fall through the Tax Cuts and Jobs Act (TCJA). At this time it has not been put into law, and the Senate may propose changes; however, if it passes, here is what you need to know.
(The changes are generally effective for tax years after 2017.)
How will these changes affect you?
There is one main change that will impact divorcing couples:
Alimony or Maintenance will no longer be tax deductible.
Up until now, alimony (aka, spousal support or maintenance) is deductible by the payor and taxable to the payee. This often allows divorcing couples to shift income from a higher tax bracket to a lower tax bracket and reduces their overall tax bill, thereby sending less money to the IRS.
The proposed change could have large financial implications: It will cost the payor more and allow the recipient to receive more. Per the language in the Act, the change applies to divorce decrees and separation agreements executed after 12/31/17. Only time will tell if State Laws and alimony formulas will be adjusted to account for the change in tax treatment.
The proposed tax change would mean that alimony would have the same tax treatment as child support.
More changes you should know about.
1. Change to the income tax rate.
In an effort to simplify the tax code, there will be 4 tax brackets instead of the seven brackets that we currently have. The new brackets would be 12%, 25%, 35% and 39.6%. Note that the highest tax bracket is unchanged at 39.6%.
2. An increase in standard Deductions.
Current standard deductions would almost double to $24,000 for joint filers and $12,000 for single filers. While there is currently a standard deduction for those filing Head of Household, the TCJA is silent as to the new standard deduction for Head of Household filers.
The purpose of this change is to simplify the tax filing process by greatly reducing the number of taxpayers who itemize deductions.
3. Maximum Rate on business income for individuals.
Small businesses such as Partnerships, Sole Proprietorships, LLCs, or S- Corporations are considered “pass-through” entities. This means that the income generated from the business is reported on the owner(s) individual tax return and taxed at individual rates. The highest rate of tax under the current system is 39.6%.
Under the proposed changes, a portion of the income can be treated as “business income” and will be taxed at a maximum rate of 25%. This could potentially be a huge saving for those who own these types of businesses.
In reading the Tax Cuts and Jobs Act, this provision is complicated. It’s a good idea to consult a tax professional. This provision alone will keep the CPAs quite busy!
4. A new limit to Mortgage Interest Deduction.
Currently, if you have a mortgage up to $1,000,000, you can deduct the interest on that mortgage as an itemized deduction. However, the proposed change reduces the limit to interest on mortgages of $500,000 or less. This change has an effective date of November 2, 2017. So any mortgage or refinance incurred after November 2, 2017 would be affected by the new law. Existing mortgages would be grandfathered in and not affected by the change.
While many regions across the country will not be impacted by this change due to lower housing prices, this will impact many buyers in areas with expensive real estate markets.
It’s time to consult a professional.
There are many other changes listed in the Tax Cuts and Jobs Act. If you are concerned or want to know if you should do any tax planning before the end of the year, it is a good idea to consult your tax professional sooner rather than later.
Sandi Gumeson is a Certified Divorce Financial Analyst® in the Denver area. She is also a CPA (CA License), a member of the AICPA, and a member and on the Board of Directors for the Institute of Divorce Financial Analysts. Sandi’s extensive experience in finance, analysis, operations, budgeting, and forecasting enables her to provide a high level of expertise in understanding the overall financial picture for her clients. To contact Sandi for assistance, call 303-378-9323 or email firstname.lastname@example.org.
For more about the TCJA from Wellspring Divorce Advisors, click here.