The Tax Cuts and Jobs Act that was passed at the end of 2017 means that divorce could become more expensive for couples in Kentucky. For example, parents will no longer be able to take turns claiming children as exemptions.
Instead, there will be an increase in the head of household deduction. Claiming head of household requires that the person be single, have the dependent in the household at least half the time and pay more than half of the household expenses. This parent can also claim the child tax credit. Since the IRS has not yet issued guidance, it is not clear whether this will be tradeable. Parents may want to include language in the divorce agreement that allows them to trade the credit if it becomes possible.
Another major change involves alimony. For divorces that are finalized by the end of 2018, alimony will remain tax-deductible for the person who pays it. The recipient will pay taxes on alimony. For divorces after that date, the payment will no longer be tax-deductible and the recipient will not pay taxes. This could result in less alimony for the recipient. Furthermore, while this is one element of the TCJA that is not set to sunset in 2025, it is not clear what decisions Congress may make about it. Therefore, couples may want flexible provisions about it as well.
There may be a number of other financial considerations during divorce unrelated to the tax bill. For example, there may be complex rules around dividing a pension or an annuity. With a pension or a 401(k), a document called a qualified domestic relations order is necessary to avoid penalties and taxes. If the couple owns a home, neither may have the liquidity to buy out the other immediately, but it might also be a bad time to sell.
Instead, there will be an increase in the head of household deduction. Claiming head of household requires that the person be single, have the dependent in the household at least half the time and pay more than half of the household expenses. This parent can also claim the child tax credit. Since the IRS has not yet issued guidance, it is not clear whether this will be tradeable. Parents may want to include language in the divorce agreement that allows them to trade the credit if it becomes possible.
Another major change involves alimony. For divorces that are finalized by the end of 2018, alimony will remain tax-deductible for the person who pays it. The recipient will pay taxes on alimony. For divorces after that date, the payment will no longer be tax-deductible and the recipient will not pay taxes. This could result in less alimony for the recipient. Furthermore, while this is one element of the TCJA that is not set to sunset in 2025, it is not clear what decisions Congress may make about it. Therefore, couples may want flexible provisions about it as well.
There may be a number of other financial considerations during divorce unrelated to the tax bill. For example, there may be complex rules around dividing a pension or an annuity. With a pension or a 401(k), a document called a qualified domestic relations order is necessary to avoid penalties and taxes. If the couple owns a home, neither may have the liquidity to buy out the other immediately, but it might also be a bad time to sell.
