Sweeping changes were made to the tax code effective in 2018. Contrary to tax simplification as original espoused, there are sections of the law that are quite complicated. You are advised to ask your tax preparer how this new tax law may effect your own tax return.
Tax rates, tax brackets, and the standard deduction were all changed. For most taxpayers, these changes may lower their tax bill.
As an LGBTQI couple divorcing with children, the child tax credit has increased. So whoever claims the child as an exemption can claim this credit within expanded income limits. The increase in the child tax credit helps make up for the elimination of all personal exemptions.
Deducting the interest on any existing or new home equity loans is no longer allowed unless the loan was really used for home improvements (considered to be “acquisition indebtedness”) and not for any other purpose (considered to be “home equity indebtedness”) such as paying for college, buying a car, paying off credit cards, etc.
For the lower-earning LGBTQI spouse, there may be a need to receive spousal support for a time. The Tax Cuts & Jobs Act changed the way spousal support is taxed for all divorce agreements finalized after December 31, 2018. Existing divorce agreements can be modified after 2018 to take these changes into account but after 2018 the new rules are required. It’s important to note, that the new tax law has not affected child support. Child support is totally separate from spousal support. Currently, spousal support is taxable for the recipient. On the other hand, the spouse paying the support can deduct this amount from income. In 2019, this tax arrangement is reversed. Support is not taxable to the one who receives it and is not tax deductible to the person who pays. Taking into account this new rule, the recipient may get a lower support payment.
It may, however, be easier to qualify for the child credit since the support will no longer be considered income. Also, if the receiving spouse doesn’t have any employment income, they might not be able to make an IRA contribution after this new law takes effect since the spousal support will not be considered qualifying income for making the IRA contribution. There could be IRA rule changes in the future to allow for this or not.
When negotiating the divorce agreement, it’s advantageous to have a clear understanding of your after-tax cash flow when the divorce is final. A professional experienced and qualified in reviewing all of the financial aspects of divorce can help with this understanding.