New Tax Law Impact on Matrimonial Disputes Beginning 2019

As the calendar year is coming to a close and President Trump’s Tax Cuts and Jobs Act (TCJA) inches closer to its first year of implementation related to alimony, many are left wondering how the new Federal tax laws and rates may impact individuals going through matrimonial disputes. It is important to clarify that legislature and guidance have not been fully made available to the public. We have listed a few of the key changes here that will take effect on January 1, 2019 and are currently set to expire on December 31, 2025.

  • Alimony will no longer be deductible for the paying spouse and is not considered as taxable income to the receiving spouse for any separation agreements executed after December 31, 2018. While guidance has not been passed down on any alimony modifications made to an agreement after December 31, 2018, there is a possibility that any significant changes will be considered a “new agreement”, subjecting individuals to the new tax law. State legislation, specifically in New Jersey, allows a paying spouse to deduct alimony for state income tax purposes while the receiving spouse must recognize alimony as income. It is important to remember that every state will vary in its acceptance of Federal tax laws.
  • As part of itemized deductions, state and local taxes paid (including real estate taxes) will now be limited to $10,000. This limitation may significantly impact individual tax payers and has a potential effect on equitable distribution negotiations regarding spouses who may seek to keep the marital residence.
  • Exemptions, in conjunction with child dependencies, no longer provide a reduction to taxpayer’s Adjusted Gross Income. However, a child dependency can impact an individual’s filing status, which can have an impact on one’s tax rate, standard deduction and tax credits. As part of the TCJA the child tax credit has increased from $1,000 to $2,000 per qualifying child, with income limitations effecting the resulting credit.
  • Specific changes have been made to how business owners are taxed. The intricacies of these changes all depend on a company’s structure. Perhaps the simplest change to take effect is the taxing of C-Corporations who are now subject to a flat 21% tax rate. For “pass-through” business owners, who file as a S-Corporation, Partnership or sole proprietor, the TCJA has introduced a Qualified Business Income deduction (QBI) which can reduce the amount of pass-through business income subject to income tax. Depending on a company’s structure, the business activity of its business or its business investments, the determination of the QBI deduction can range from a simple calculation to a very detailed complex calculation.
  • 529 plans now allow up to $10,000 to be withdrawn for students in private school between Kindergarten and grade 12.

While more changes have occurred under the TCJA, we wanted to highlight the key items that could significantly impact current negotiations in the divorce process.

The Valuation, Forensic, Litigation team at Sax LLP are here and happy to help assist with all financial matters related to the divorce process.  Feel free to contact us for more information or with any inquiries you may have.

Megan Sartor, CPA/ABV/CFF

Partner, Sax LLP

[email protected] | (973) 472-6250

Wishing you all a happy and healthy New Year.

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