The Tax Man Cometh – And He Taketh Away: Good or Bad?
In most divorce cases, there are tax considerations, such a dependent exemptions. This is sometimes a key concern in divorce cases. As part of the much anticipated tax reform, our financial partners are providing the meaning and impact upon divorcing parties, divorced parties, and paternity cases. This is the focus of this blog post.
The first major change analyzed in this blog is the elimination of the dependent exemption. After years of fighting over the right to claim the child(ren) as a dependant and receive the tax benefit of same, this exemption has been deleted. Over the years the Indiana Child Support Guidelines have provided the factors for the courts to consider in determining who should claim the child(ren).
Many divorce and paternity agreements were made taking into account the tax benefit a parent would receive; and with one stroke of the pen, the benefit has been deleted. This will not likely lead to a basis for child support modification, but in certain circumstances, it may have an impact on future agreements and payment of extra expenses, such as extra-curricular fees, and other non-essential items, such as providing cell phone and service to a child.
The second major change is that the Child Tax Credit has been doubled and is now $2,000 per child. The child tax credit has never been transferable between the parties, so this does not impact the parties’ positions as much as the loss of the dependent exemption. Going along with the Child Tax Credit is the income phase-out, which begins at $200,000 and tops out at $240,000 for a Single/Head of Household. There is no tax benefit for taxpayers who earn more than $240,000 per year.
The third and final reform addressed in this blog that impacts divorcing parties is the change to the ability of a spouse to deduct maintenance payments from their income and for the recipient of maintenance to be taxed upon same as income. The benefit is that the recipient of maintenance is typically in a lower tax bracket and thus an enticement for payment through maintenance for the higher income earner. This does not become effective until January 1, 2019.
It seems as though there has been a carve-out of the reform for maintenance agreements that are in place prior to December 31, 2018. These agreements that are currently in place will effectively be “grandfathered in” and those agreements will continue to be taxed to the payee and tax deductible by the payor.
This blog post is written by attorneys at Ciyou & Dixon, P.C., with credit given to Jason Llewellyn with Holistic Financial Partners for his succinct (tentative) explanation of the tax reform. The attorney’s at Ciyou & Dixon, P.C. frequently consult with and utilize CPAs and other financial advisors to assist with complex marital estate matters and the tax impact upon divorcing parties considering the division of assets. This blogs’ purpose is educational in nature to explain the complex factual background and decisions that may be considered in talking with counsel and your tax professional in a domestic context. As a general rule, a potential party with a child-related matter should meet with family law counsel and have a tax consult before any filing with the Court.
Ciyou & Dixon, P.C. handles complex financial and custody and parenting time cases in family law matters throughout the State of Indiana. This blog is not intended to be legal advice, nor tax advice, or a solicitation for services. It is an advertisement.