16
Apr2018

Tax Reform’s Impact on Divorce

The 2017 Tax Cuts and Jobs Act imposes sweeping changes to the tax code. Many of the changes will affect taxpayers going through a divorce.

Effect on Personal Exemptions

Old Law: In 2017, taxpayers claimed a personal exemption for themselves, their spouse (if married filing jointly) and each qualifying child or qualifying relative. Each exemption reduced taxable income by up to $4,050 in 2017. However, the total personal exemptions to which an individual is entitled was phased out (i.e. reduced and eventually eliminated) as their adjusted gross income moves through a certain range as outlined below:
1. Filed Single: Phase out began at $261,500. Completely phased out at $384,000.
2. Filed Head of Household: Phase out began at $287,650. Completely phased out at $410,150.
3. Married Filing Jointly: Phase out began at $313,800. Completely phased out at $436,300.
4. Married Filing Separately. Phase out began at $156,900. Completely phased out at $218,150.

New Law: There are no longer any personal exemptions available. Personal exemptions are scheduled to return in 2026, unless modified or extended by Congress. The elimination of personal exemptions is said to be mitigated by increased in the Child Tax Credit and the standard deduction, as well as decreases in individual tax rates.

Effect on Child Care Tax Credit:

Prior Law:
1. Qualifying Child: Under the prior law, each qualify child under the age of 17 was allowed a $1,000 credit opportunity.
2. Phase-Out Thresholds: Eligibility for the credit was phased-out if the taxpayer’s modified adjusted gross income was above a certain threshold as outlined below:

A. Married Jointly Filed: Reduced by $50 for each $1,000 over adjusted gross income of $110,000
B. Married Filed Separately: Reduced by $50 for each $1,000 over adjusted gross income of $55,000.
C. Single, Head of Household or Qualifying Widow: Reduced by $50 for each $1,000 over adjusted gross income of $75,000.

New Law:
1. Qualifying Child: The credit has increased from $1,000 to $2,000 for each qualify child.
2. Additional Family Member Credit: An additional non-refundable credit will be allowed for qualifying non-child dependents of the taxpayer in the amount of$500, which was previously not available.
3. Increased Phase-Out Thresholds: Eligibility for the credit is phased-out if the taxpayer’s modified adjusted gross income is above a certain threshold. New law increases these as outlined below:

A. Married Jointly Filed: Reduced by $50 for each $1,000 over adjusted gross income of $400,000
B. Married Filed Separately: Reduced by $50 for each $1,000 over adjusted gross income of $200,000
C. Single, Head of Household or Qualifying Widow: Reduced by $50 for each $1,000 over adjusted gross income of $200,000.

Effects on Alimony Deductibility:

Prior Law: The prior law was that alimony was taxable to the recipient, and deductible by the payor.
New Law:
1. Alimony Orders from Now to December 31, 2018: Newly divorced spouses have until December 31, 2018 to enter an agreement that includes tax-deductible alimony.
2. Alimony Orders After December 31, 2018: For divorces entering after that date, alimony paid will not be tax deductible.
3. Alimony Orders Before December 31, 2018: Importantly, the bill will not affect the tax deductibility of alimony judgments entered before December 31, 2018.
4. Modification of Alimony Orders Before December 31, 2018: In addition, alimony will continue to be tax deductible for divorce spouses who modify existing alimony orders, so long as they were divorced before December 31, 2018.

Effect on Standard Deductions:

Old Law:
1. Filing Single: For filing single, the deduction was $6,350.
2. Filing Married: For married filing jointly, the deduction was $12,700.
3. Filing Head of Household: For filing head of household status, the deduction was $9,350.

New Law: The new standard deductions are increased and in place for 2018 through 2025.
1. Filing Single: For filing single, the deduction is increased to $12,000. (Increase of $5,650).
2. Filing Married: For married filing jointly, the deduction is increased to $24,000. (Increase of $11,300)
3. Filing Head of Household: For filing head of household status, the deduction is increased to $18,000. (Increase of $8,650)

Effect on Pass-Through Deductions:

Prior Law: The taxable income from pass-through entities was taxed at the individual taxpayer’s rate. Pass-through entities include: (1) sole proprietorships, (2) partnerships, (3) LLCs, and (4) S-Coprs.
New Law: The Act provides a 20% deduction for qualified business income. However, there are income restrictions based on each business owner’s income level, not on the total taxable income of the business.
1. Threshold for Qualifying for a 20% Deduction for Qualified Business Income:

A. Individual: $157,000.
B. Married Couples Filing Jointly: $315,000.

2. Below the Threshold: If the business owner’s taxable income is below the threshold, then the calculation is simply 20% deduction of the pass-through income.
3. Above the Threshold: If the owner’s taxable income exceeds the threshold, the qualified business deduction is calculated as follows: the lesser of 20% of its business income or 50% of the total wages paid by the business to its employees.

Exceptions to the 20% Qualified Business Deduction: There will be restrictions on the 20% deduction for pass-through entities that are considered a “service business” under IRC Section 1202(e)(3)(A). The businesses specifically included in this definition as a services business are: (1) Health; (2) Law; (3) Accounting; (4) Actuarial Sciences; (5) Performing Arts; (6) Consulting; (7) Athletics; (8) Financial Services; (9) Any other trade or business where the principal asset of the business is the reputation or skill of one or more of its employees.
1. Threshold for Qualifying for a 20% Deduction for Service Business:

A. Individual: $157,000.
B. Married Couples Filing Jointly: $315,000.

2. Below the Threshold: If the service business owner’s taxable income is below the threshold, then the calculation is simply 20% deduction of the pass-through income.
3. Above the Threshold: If the service business owner’s taxable income exceeds the threshold, then the 20% deduction will phase out over the next $50,000 for taxable income for individual filers and $100,000 for taxable income for married filing joint. This means that the 20% pass-through deduction will be completely gone by the following income levels:

A. Individual: $207,500
B. Married Couples Filing Jointly: $415,000

Additional Changes Which May Affect Family Law:

Itemized Deductions: removed overall limitation of itemized deductions.
Mortgage Interest Deduction: mortgage interest deduction is limited to acquisition loans over $750,000 for loans incurred after December 15, 2017. Loans incurred bdefore December 15, 2017 are limited up to $1,000,000. No deduction for home equity indebtedness.
State and Local Taxes (SALT): SALT are limited to $10,000. You cannot claim a pre-payment of income tax for a future taxable year.
529 Plans: 529 plans can now be withdrawn tax free for up to $10,000 per year per student for public, private or religious elementary or secondary school. Higher education expenses now include expenses in connection with homeschool.
Alternative Minimum Tax (AMT) Exemption: AMT exemption is increased to $109,400 for Married Filing Jointly, $54,700 for Married Filing Separately, and $70,3000 for all others. The Phase-out threshold increased to $1,000,000 for Married Filing Jointly and $500,000 for all other taxpayers.
Charitable Contributions: Percentage limit increased to 60%. Cannot deduct college contributions that are in exchange for college athletic event seating rights.
Itemized Deductions Subject to 2% Floor: Can no longer deduct miscellaneous itemized deductions that are subject to the 2% floor, such as (1) tax preparation and investment fees; (2) professional duties; (3) home office used exclusively for work; (4) professional journal and magazine subscriptions; and (5) work-related education and more.
Estate and Gift Tax Exemption: Doubled to $10,000,000 for estates of decedents dying after December 31, 2017.
Plug-In Electric Drive Motor Vehicles: Credit up to $7,500.
Affordable Care Responsibility Payment: Reduced to $0 for tax years beginning after December 31, 2018.

Effect on Tax Rate Changes:

Prior Law:
2017 Filing Single:

A. Income Up To $9,325: 10% of the taxable income
B. Income Over $9,325 but not over $37,950: $932.50 plus 15% of the excess over $9,325
C. Income over $37,950 but not over $91,900: $5,266.25 plus 25% of the excess over $37,950.
D. Income over $91,900 but not over $191,650: $18,713.75 plus 28% of the excess over $91,900.
E. Income over $191,650 but not over $416,700: $46,642.75 plus 33% of the excess over $191,650.
F. Income over $416,700 but not over $418,400: $120,910.25 plus 35% of the excess over $416,700.
G. Income over $418,400: $121,505.25 plus 39.6% of the excess over $418,400.

2017 Filing Head of Household:

A. Income up to $13,350: 10% of the taxable income.
B. Income over $13,350 but not over $50,800: $1,335 plus 25% of the excess over $13,350.
C. Income over $50,800 but not over $131,200: $6,952.50 plus 25% of the excess over $50,800.
D. Income over $131,200 but not over $212,500: $27,052.50 plus 28% of the excess over $131,200.
E. Income over $212,500 but not over $416,700: $49,816.50 plus 33% of the excess over $212,500.
G. Income over $416,700 but not over $444,550: $117,202.50 plus 35% of the excess over $416,700.
H. Income over $444,550: $126,950 plus 39.6% of the excess over $444,550.

2017 Married Filed Jointly or Surviving Widow:

A. Income up to $18,650: 10% of the taxable income
B. Income over $18,640 but not over $75,900: $1,865 plus 15% of the excess over $18,650.
C. Income over $75,900 but not over $153,100: $10,452.50 plus 25% of the excess over $75,900.
D. Income over $153,100 but not over $233,350: $29,752.50 plus 28% of the excess over $153,100.
E. Income over $233,350 but not over $416,700: $52,222.50 plus 33% of the excess over $233,350.
F. Over $416,700 but not over $470,000: $112,728 plus 35% of the excess over $416,700.
G. Over $470,700: $131,628 plus 39% of the excess over $470,700.

2017 Married Filing Single:

A. Income up to $9,325: 10% of the taxable income.
B. Income over $9,325 but not over $37,950: $932.50 plus 15% of the excess over $9,325.
C. Income over $37,950 but not over $76,550: $5,226.25 plus 25% of the excess over $37,950.
D. Income over $76,550 but not over $116,675: $14,876.25 plus 28% of the excess over $116,675
E. Income over $116,675 but not over $208,350: $26,111.25 plus 33% of the excess over $116,675.
F. Income over $208,350 but not over $235,350: $56,364 plus 35% of the excess over $208,350.
G. Income over $235,350: $65,814 plus 39.6% of the excess over $235,350.

New Law:

Filing Single:

A. Income Up To $9,525: 10% of the taxable income.
B. Income Over $9,525 but not over $38,700: $952.50 plus 12% of the excess over $9,525
C. Income over $38,700 but not over $82,500: $4,453.50 plus 22% of the excess over $38,700.
D. Income over $82,500 but not over $157,500: $14,089.50 plus 24% of the excess over $82,500.
E. Income over $157,500 but not over $200,000: $32,089.50 plus 32% of the excess over $157,500.
F. Income over $200,000 but not over $500,000: $45,689.50 plus 35% of the excess over $200,000.
G. Income over $500,000: $150,689.50 plus 37% of the excess over $500,000.

Filing Head of Household:

A. Income up to $13,600: 10% of the taxable income.
B. Income over $13,600 but not over $51,800: $1,360 plus 12% of the excess over $13,600.
C. Income over $51,800 but not over $82,500: $5,944 plus 22% of the excess over $51,800.
D. Income over $82,500 but not over $157,500: $12,698 plus 24% of the excess over $82,500.
E. Income over $157,500 but not over $200,000: $30,698 plus 32% of the excess over $157,500.
G. Income over $200,000 but not over $500,00: $44,298 plus 35% of the excess over $200,000.
H. Income over $500,000: $149,298 plus 37% of the excess over $500,000.

Married Filing Jointly or Surviving Widow:

A. Income up to $19,050: 10% of the taxable income
B. Income over $19,050 but not over $77,400: $1,905 plus 12% of the excess over $19,050
C. Income over $77,400 but not over $165,000: $8,907 plus 22% of the excess over $77,400
D. Income over $165,000 but not over $315,000: $28,179 plus 24% of the excess over $165,000.
E. Income over $315,000 but not over $400,000: $64,179 plus 32% of the excess over $315,000.
F. Over $400,000 but not over $600,000: $91,379 plus 35% of the excess over $400,000.
G. Over $600,000: $161,379 plus 37% of the excess over $600,000.

Married Filed Single:

A. Income up to $9,525: 10% of the taxable income
B. Income over $9,525 but not over $82,500: $952.50 plus 12% of the excess over $9,525
C. Income over $38,700 but not over $157,500: $4,453.50 plus 22% of the excess over $38,700
D. Income over $82,500 but not over $200,000: $14, 089.50 plus 24% of the excess over $182,500.
E. Income over $157,500 but not over $200,000: $32,089.50 plus 32% of the excess over $157,500.
F. Over $200,000 but not over $300,000: $45,689.50 plus 35% of the excess over $200,000.
G. Over $300,000: $80,689.50 plus 37% of the excess over $300,000.

If you have any questions or if you need guidance, please call the attorneys at Wynn & Wynn, P.C. at 1.800.852.5211 or request a free consultation.

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