Tax Cuts and Jobs Act: The New Federal Divorce Law
The Bencher—September/October 2018
By Regina Snow Mandl, Esquire
I have never had a client who has said that he or she is getting divorced to take advantage of the tax laws. Divorce is an overwhelmingly difficult and often very painful personal experience, and while support and property division are factors, they generally are not what drives the decision to end a marriage. Historically, divorce laws are shaped by the common and statutory laws of the states, and with only certain exceptions it is state, not federal, law that is central. The Tax Cuts and Jobs Act H.R.1, enacted on December 22, 2017, has changed this dynamic in both obvious and subtle ways, culminating in what one could call the “New Federal Divorce Law.”
Although there is the perception that the primary purpose of the Tax Cuts and Jobs Act was to significantly reduce tax rates for businesses and simplify taxes for individuals, there is a category of individuals also greatly affected: divorced and divorcing couples. The changes to the tax laws for these individuals are so profound that they require a reexamination of traditional concepts for family support and, as a result, asset division. These changes took effect January 1, 2018, with the exception of the repeal of the alimony deduction, which takes effect after December 31, 2018. Unlike the change in the corporate tax rate, the tax law changes for individuals sunset in 2025 unless further legislation is enacted. The one exception is the expansion of 529 Plans, described below, which in part does not have an expiration date.
The Tax Cuts and Jobs Act is complex and lengthy, and I have no doubt that there will be much more discussion about its impact on family law in the future. To begin the conversation, I have selected the following five areas:
- Repeal of the alimony deduction effective December 31, 2018, and for all modifications to preexisting divorce judgments if the modification expressly provides that alimony is not deductible by the payor or includible by the payee.
- Repeal of personal exemptions effective January 1, 2018, worth $4,050 per person in 2017.
- Doubling of the child care tax credit and substantial increases in the income limits for who can claim the credit. For taxpayers who pay no federal taxes, there is a credit of up to $1,400.
- Expansion of categories for distribution of 529 Plans, which can now be used for up to $10,000 per student per calendar year for attendance at a private or religious elementary or secondary school and may also be applied to an ABLE program.
- Repeal of the interest deduction on a home equity line of credit or home equity loan, unless for purposes of acquisition or home improvement.
Repeal of the Alimony Deduction
Under current federal law, alimony payments are deductible from the gross income of the payor and taxable as income to the recipient. The Tax Cuts and Jobs Act repealed the alimony deduction, so that it is no longer deductible from the gross income of the payor, nor is it taxable to the recipient. The first version of the bill would have made the repeal of the alimony deduction effective as of January 1, 2018, and would have applied to any modification made of any instrument executed before then if expressly provided for by such modification. The earlier Summary of Section 1309 of the Tax Cuts and Jobs Act H.R. 1 stated that the considerations were that the provision would eliminate what is effectively a “divorce subsidy” in that a divorced couple can often achieve a better result than a married couple and that the provision recognizes that spousal support should have the same tax treatment as within the context of a married couple. The bill was eventually enacted repealing the alimony deduction, but the effective date was changed from January 1, 2018, to December 31, 2018. See Section 11051(c), not part of the Internal Revenue Code.
In Massachusetts, it took years to enact the Alimony Reform Act (Massachusetts General Laws Chapter 208 §§ 48-55; 2011 Mass. Acts 124 § 3). The Massachusetts Child Support Guidelines (www.mass.gov/courts/docs/child-support/2017-child-support-guidelines.pdf) are reviewed and revised periodically, most recently in September 2017. Both the Alimony Reform Act and the Massachusetts Child Support Guidelines have specific mathematical directions that were carefully developed. One of the factors in the calculation was the deductibility of alimony for income tax purposes. To fix this will likely take an act of the Legislature or the appellate courts.
While this all gets sorted out, the Probate and Family Court will need to consider if an alimony order of 30–35 percent of a payor’s income is fair when it will not be deductible by the payor, nor taxable to the payee. Under the existing alimony law, the court may need to write findings of fact in each case in which the alimony order does not conform to the statute. There will be a rush to finish divorce cases, either by trial or agreement, to lock in the alimony deduction before the end of 2018, burdening the probate and family courts even more.
The effect of the deduction of the alimony repeal goes beyond the boundaries of the divorce cases themselves. The Tax Cuts and Jobs Act in grandfathering preexisting divorce agreements refers to “divorce or separation instruments.” Code Section 121 (d)(3)(C) defines a divorce or separation instrument as “(i) decree of divorce or separate maintenance or written instrument incident to such decrees, (ii) a written separation agreement, or (iii) a decree (not described in clause (i) requiring a spouse to make payments for the support or maintenance of the other spouse.” What will happen to alimony provisions in existing pre-marital and post-marital agreements?
Repeal of the Personal Exemptions
Many divorce agreements have provisions for taking the personal exemptions for children. This will no longer be available, even if it’s already in the agreement. However, as the repeal expires December 31, 2025, it would be prudent to provide for the taking of personal exemptions for the children if, as, and when they become available. See Section 11041 and Code Section 151.
Child Care Tax Credit
The child care tax credit has been increased from $1,000 to $2,000 per child per calendar year. The income limits for the parents have been dramatically increased from $75,000 to $200,000 for unmarried persons and from $110,000 to $400,000 for married taxpayers. For taxpayers who pay no federal taxes, there is a credit of up to $1,400. The suspension of the personal exemptions through 2025 does not affect which party is entitled to the child care tax credit. See Section 11022 and Code Section 24.
529 Plans, which had been limited to savings for higher education expenses, can now be used for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school (Section 11032.529, Code Section 529). There is a cap of $10,000 per student per calendar year from all plans combined. The expansion of the use of 529 Plans does not have an expiration date except for transfers to ABLE programs, which will expire at the end of 2025.
A note of caution from Barry Salkin, Esquire, of The Wagner Law Group: “The benefit of 529 Plans to a certain extent depends on whether state law will allow deduction or credits for these contributions. A change in the federal tax code is not automatically followed in Massachusetts. If Massachusetts takes no action with respect to 529 Plans, then individuals who contribute to a 529 Plan for elementary and secondary education will not be entitled to the Massachusetts state tax deduction for contributions and may be taxed upon the withdrawal of the funds from the plan for pre-college expenses. See Sections 11032 and 11025.”
Deduction of Interest on a Home Equity Line of Credit or Loan
Sometimes parents will access the equity in their home to pay for a child’s college education. Effective January 1, 2018, the interest on a home equity line of credit or home equity loan will no longer be deductible unless it is used for “acquisition purposes.” Acquisition purposes include improvements to the residence. The taxpayer will need to keep records to show whether the funds were used to improve the residence. Mortgage interest is still deductible. Preexisting mortgages (the old limit was $1 million) are grandfathered; new mortgages of up to $750,000 will have an interest deduction; and interest for refinanced mortgages up to the limits of the grandfathered mortgage or the new limit will be allowed. See Section 11043 and Code Section 163(h)(3)(F).
What to Do Now
Given that most of these changes expire in 2025, going forward it would be a good idea to have a tax clause in all new divorce cases that provides options should the law rewind to 2017. While no one has a crystal ball as to what may be in store, it would be prudent to consider language in all agreements and proposed judgments that will minimize future disputes and the attendant legal costs.
This article was written to highlight five changes that I felt will likely affect divorce cases. However, keep in mind that there have been extensive changes in the federal tax laws (the new federal tax law is over 600 pages long). Care should be given in every situation to evaluate how the new federal tax law will affect the property and support provisions in each particular case. My intention was to provide food for thought, and not to give, nor should it be considered to be, legal advice.
Regina Snow Mandl, Esquire, is a partner at The Wagner Law Group in Lincoln, Massachusetts. She is a member of the Massachusetts Probate and Family AIC in Boston and a former member of the American Inns of Court Board of Trustees.