You likely have heard that Congress passed a substantial tax reform bill that was signed into law last month. Nothing in the tax law will affect your taxes for 2017, however, big changes are happening in 2018, and some in 2019.
The bill is quite extensive, so it is best to consult with a tax attorney or CPA for the latest updates on how the bill will affect you and your family personally, however I can detail what we know so far, regarding how the tax bill will change the way family law attorneys in California deal with taxes, especially when it comes to determining support payments.
1) Tax brackets are changing starting January 1, 2018. This means the amount of federal taxes you or your spouse pay (or both, if filing jointly) may decrease slightly (anywhere between 2-6%). In theory, this should mean that you will have more disposable income, even with working the same job at the same rate of pay.
2) The standard deduction is increasing starting January 1, 2018. This means that the amount you can deduct from your federal income is higher, thus, you are taxed on less of your income than before, and may opt to not itemize deductions.
3) The itemized deductions are changing starting January 1, 2018. The interest paid on mortgage debt will be reduced for loans up to $750,000 instead of $1 million for any new mortgages on qualified residences purchased after December 15, 2017. Existing mortgages are grandfathered in. So, in a divorce, this may affect the taxes for former spouses who sell or refinance their existing home. You also will no longer be able to deduct state and local taxes, including property taxes paid in itemized deductions that total above $10,000. Finally, the amount you can deduct for uninsured medical expenses is also changing.
4) The child tax credit is increasing starting January 1, 2018. The amount of a refund you can receive is also increasing, as well as the threshold to obtain the child tax credit. This means the person with primary custody of the minor children (or who was assigned the child tax credit in a divorce/paternity case) will receive a substantial reduction in their taxes owed.
5) The deduction of alimony/spousal support is being eliminated starting January 1, 2019. This means that a payor spouse can no longer deduct spousal support from their income (reducing taxes they pay) and the payee spouse will no longer be required to report the support received as income. This means that the amount which the court will order the payor spouse to pay the payee spouse will likely be reduced significantly. This will only apply to divorce judgments/orders which are finalized after December 31, 2018.
Family Law attorneys are still learning about all of the in’s and out’s of the new tax bill and how it will affect each case individually. Luckily, there are many tools at our disposal to help us with the process. For instance, the court (and The Reape-Rickett Law Firm) uses a program called “DissoMaster” to assist us with calculating child and temporary spousal support. These programs take the tax laws into account, including your tax bracket(s), deductions and credits. So, your support calculations using those programs should be accurate based on your current situation and the new tax laws.
The courts do not use “DissoMaster” or other programs to calculate spousal support on a permanent basis, however. This doesn’t mean a Judge will order you to pay the same amount of support in 2018 as they will in 2019. Family Code section 4320 details all of the factors, the court must consider when ordering spousal support on a permanent basis. One such factor is the payor’s ability to pay, based on the party’s earning capacity, income, assets, and standard of living. FC 4320 (c). The court also evaluates the immediate and specific tax consequences to each party. FC 4320 (j). Finally, the court also must consider the balance of hardships to each party. FC 4320 (k). Thus, the court will be examining the lack of deductibility of spousal support to the payor and tax-free income to the payee when considering what a fair spousal support award should be.
All in all, just like with any other major legislative change, the Family Law courts are courts of equity, and they will make orders they are able to under the law to be as equitable as possible. Skilled Family Law attorneys, such as those at Reape-Rickett, will also be sure to find ways to protect our clients in these ever-changing times.