With the passing of the U.S. Tax Cuts and Jobs Act of 2017, it is even more important than ever to make sure you’re taking taxes into account when you’re negotiating your settlement. There are several changes to the law, but the main ones that you should be paying particularly close attention to as you negotiate a divorce agreement are as follows:
1. Alimony payments made by a former spouse will no longer be tax deductible for the payor. This is going to have the biggest effect on divorce negotiations.
a. Until the end of 2018
i. The payor of alimony is able to deduct that amount against his/her taxes. What that means, is that whatever the alimony amount is, in effect it’s less for the payor once you take into account the tax deduction.
ii. The recipient will have to pay taxes on the alimony which is treated as income. Typically, tax rates for the recipient are lower than the payor thus making it a win/win for both parties.
b. Beginning in 2019
i. Alimony payments will no longer be tax deductible to the payor.
ii. The recipient not be taxed on the alimony received as income.
2. The loan amount on which mortgage interest can be deducted has been reduced to $750k from $1m (not for existing home mortgages only new ones).
a. If you’re renegotiating your mortgage because the home is being transferred into your spouse’s name, that will affect your taxes.
b. If you’re looking to move and take out a new mortgage greater than $750k, again, you will feel the effects.
3. Interest on Home equity loans is no longer tax deductible.
4. The deduction of your State and Local taxes against Federal Income taxes has been reduced to $10k.
This is a very simplified version of the changes. Make sure you should check with your CPA or Certified Divorce Financial Analyst to help you accurately plan for the tax consequences.