The end of 2017 saw the passage of the largest tax reform legislation in more than thirty years, changing how divorce and taxes interact. If you’re divorced or considering a divorce, you should understand the effects of this new tax legislation on spousal maintenance, child tax credits and dependency exemptions, and business valuation. Keep in mind that these changes do not apply to your tax return filed in April 2018 for tax year 2017.
Prior to the passage of the new tax bill, the receiving spouse was taxed on maintenance payments, and the paying spouse received a tax deduction equal to the amount of their payments. In the new tax bill, maintenance is neither taxable or deductible if the order or agreement is finalized after December 31, 2018. Essentially, this is the last year to reach an agreement or obtain an order that ensures you will receive the tax benefit of paying maintenance.
The tax changes will typically not apply to modifications of maintenance orders that were initially entered into prior to December 31, 2018. Based on Colorado’s maintenance guidelines, this change is a significant benefit to the receiving spouse. We expect the Colorado Legislature to adjust the maintenance guidelines to account for the change in taxation, but there is no current legislation proposed and until they do, it’s best for paying spouses to finalize maintenance orders prior to the end of the year.
Dependency Exemptions & Child Tax Credits
The new tax bill also eliminates the dependency exemptions that we always allocate during a divorce when there are children involved. Thus, if you had the benefit of receiving a dependency exemption in your court orders or agreements, you will no longer receive those benefits when you file your tax return in 2019 for tax year 2018.
The child tax credit has been increased in the new tax bill and it no longer phases out at $75,000 for single filers, but phases out at $200,000. We anticipate both modifications of prior orders and new orders to allocate the child tax credit much like the dependency exemptions were allocated. While you typically need to be the parent with your child the majority of the year to claim the tax credit, a court order dividing the credit through your divorce will permit you to claim the tax credit even if you have your child less than half the time.
On the business valuation side of an asset during a divorce, the decrease in the corporate tax rate – if applicable to the particular business – will increase the value of that business as there will likely be more profits and therefore more value. The big unknown is whether the corporate tax rate applies to your particular business. The IRS will need to draft a new set of rules before we can determine what businesses are excluded from the tax change.
Still have questions about how tax changes might affect your pending divorce? Contact us today.