In our divorce workshops this past weekend, we shared information on tax reform and the impact on divorce settlements. Consider this, however – the best tax planning under the new law could become perilous if the regime changes as early as midterm elections. The next potential upheaval would be 2020 after that and, of course, except for permanent corporate tax cuts, this all sunsets in 2025 anyway. And remember, tax laws are subject to ‘fixes’ as written and that is a process ongoing now, especially when a long bill is pushed through in a short time period.
Let’s look at some items that all divorcing couples should consider this year:
Alimony: Repealing a 75 year-old law where 98% of the folks receiving alimony in 2014 were women, this is a challenging change. For divorces in 2018, it remains that if you complete your divorce or property settlement before 1/1/2019, you’ll fall under the ‘old’ rules of having alimony tax-deductible by the person paying and taxable to the person receiving it. After 12/31/2018, it works like child support and is neither tax-deductible not taxable.
Healthcare mandate: Gone after 2018. You should not go without health insurance – period. However, if you are forced to, at least the penalty for not having it is gone.
Moving expenses: Suspended except for military.
Personal Exemptions: Gone.
Standard Deductions: $12,000 single, $18,000 Head of Household, $24,000 Joint and indexed for inflation after 2018. Planning opportunity – maybe being a renter isn’t so bad after all – consider all the changes in this new law and have a divorce financial professional model the house math for you!
Your home mortgage interest: After 12/14/17, the home mortgage interest deduction on new mortgages cannot exceed $750,000 (MFJ), $375,000 (MFS). For existing home mortgage interest debt in place before 12/15/2017, they have grandfathered $1 million in debt (MFJ) and $500k (MFS). The deductions remains for acquisition debt for both first and second residences.
Your HELOC: They repealed the deduction for home equity debt (new or existing) for 2018 and later. Divorcing couples should examine whether to pay this debt off in the course of their negotiations.
Your SALT deductions: Limited to $10,000 (MFJ), $5,000 (MFS) for property tax and income or sales tax (that’s a total $10,000). No prepayment for 2018 allowed in 2017.
Education/529s: For wealthy families that have large 529s, you may wish to take advantage of the new law allowing these plans to pay for qualified elementary and high school expenses.
Passports: Expected in March 2018, passports will be revoked (or not issued) if you owe them more than $51k (tax, penalties, interest, etc.) and you do not have an installment agreement in place or pay it off completely. Another planning opportunity for couples in this situation is to figure out how to both be debt free post-divorce.
Bitcoin: The IRS has long been investigating crypto currencies and recently scaled it back to transactions over $20k. What language should a divorce settlement include in 2018? Probably a crypto clause. Because of the anonymous nature of crypto currencies, make sure your divorce includes reference to any of these accounts should they be discovered later as existing during the marriage. In the future, we’ll likely see a box on tax returns compelling us to answer whether we have these accounts. Until then…..
Where to get help navigating all this? Right here. Welcome to your successful financial future!
DISCLOSURE: All of the above is believed to be accurate but should be considered informational only and should not be considered financial, tax, or legal advice. Seek advice from a paid professional under contract to you.
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