January 1 did not just ring in the new year. New tax provisions went into effect impacting divorce and child custody matters. Here are five important points to keep in mind.
Alimony (also known as spousal maintenance) is no longer deductible. For divorces finalized after December 31, 2018, ex-spouses paying alimony won’t be able to take a tax deduction for the payments. The payments also will be tax-free to ex-spouse recipients. Alimony paid under a divorce decree entered before January 1, 2019, however, will continue to be deductible by the payor and taxable to the recipient. Brace yourself. This tax law change could very well make divorce a longer and more expensive process. High-income divorcing spouses will likely fight to pay less alimony since it is no longer deductible. Low-income divorcing spouses, on the other hand, will fight hard to obtain as much alimony as possible since it is now tax-free.
Dependent exemptions no longer exist. Beginning with your 2018 income tax return, children won’t provide the tax deduction they used to provide because the dependency exemption has been eliminated through at least 2025. The good news is that the child tax credit doubled from $1,000 to $2,000, and the standard deduction for single taxpayers almost doubled—from $6,350 to 12,000. Thus, for the foreseeable future, divorcing parents don’t need to argue over which one may claim the dependency exemption, since it no longer exists. They can, however, negotiate which one will claim the child tax credit. But keep in mind that whoever claims the child tax credit will take the dependency exemption when it resumes in 2026.
Valuation of privately-held businesses. Due to the new lower corporate tax rate (reduced from 35% to 21%), corporation cash flows will increase. Cash flows of pass-through entities—such as partnerships, limited liability companies, S corporations and sole proprietorships—also will increase due to the new favorable tax treatment of earnings. Enhanced cash flows, in turn, will dramatically drive up the values of privately-held businesses.
College savings plans. The new tax law also allows you to withdraw up to $10,000 per year from a 529 plan to pay for K-12 private school tuition. This change should be addressed as part of the divorce negotiations, so you don’t run out of money before your children enter college.
Pre- and post-nuptial agreements. Don’t forget to review these agreements and re-negotiate them as necessary if the new tax law nullifies any of their provisions—such as the loss of the dependency exemption.