For New Jersey residents whose divorces are signed on or after January 1, 2019, they may find that their divorces are unexpectedly more expensive than they thought it would. This is because the Tax Cuts and Jobs Act, which was passed in December 2017, instituted tax law changes that impact key issues of divorce, including alimony and child support.
The value of the dependent and personal exemptions was eliminated by the TCJA. The legislation also increased the amounts of the standard deductions. For newly divorced parents who are able to file as the head of the household, they will also be able to claim the Child Tax Credit, which is $2,000 for each child who qualifies; the credit also includes a refundable $1,400 if income taxes are owed. Being able to claim tax credits is more beneficial than claiming exemptions because exemptions can only reduce the amount of taxable of income while the tax credits will reduce the amount of taxes owed.
However, the IRS has yet to publish a regulation that specifies whether the Child Tax Credit will be tradeable between parents. This is likely to be a cause for concern for parents who are attempting to work out their post-divorce finances.
The tax law changes may also be a concern for divorcees who have to pay alimony in accordance to divorce agreements signed after 2018. Beginning in 2019, alimony will no longer be deductible for those who need to make the payments. For those who receive alimony, they will no longer be required to report the payments as part of their taxable income.
A family law attorney may work to obtain the desired divorce settlement terms for clients. Clients may be advised how changes in the tax law impact what type of terms for child support and alimony should be pursued.