How the New 2018 Tax Laws Will Affect Your Matrimonial Agreement

New York & New Jersey divorce lawyer Paul Goldhamer, Esq. co-founded Kantrowitz, Goldhamer, Graifman, Perlmutter & Carballo, P.C. in 1975. Since then, in addition to his prestigious accomplishments in matrimonial and estate law, Mr. Goldhamer has committed  himself to charity fundraising, public seminars, media outreach and teaching. Paul was named a “Super Lawyer” in 2014 by Superlawyers.com.

From Paul Goldhamer, Esq.:

2018 new tax laws as they effect Matrimonial agreements: What has changed?

Divorced taxpayers combined will receive an increase in their monthly net cash flow provided their individual income is less than $200,000. But where those tax savings end up might surprise you and all that depends on how your divorce decree is drafted.

Here’s a short summary of the changes that will affect nearly all divorced taxpayers with children:

1. Lower individual income tax rates. Federal tax rates are between 10% and 37%. In 2017 a single tax filer would hit the 25% federal tax bracket with $47,950 in annual taxable income. In 2018, a single tax filer can have an annual income of $82,500 before they enter the 24% bracket.
2. Maintenance (alimony) will no longer be tax deductible to the payor or taxable to the recipient for those decrees signed after 12/31/2018. I believe if the agreement is executed properly before Dec. 31st, 2018, the parties are entitled to the deduction. But this is unsettled. The non-deductibility in most cases with a combined income under $315,000 will tend to increase net annual after-tax cash flow as opposed to an alimony tax deduction due to the lower and expanded individual income tax rates.
3. Nearly doubles the standard deduction. The standard deduction for a single filer was $6,350 in 2017 and in 2018 it is $12,000. For a married couple, it is $24,000.
4. Elimination of the personal exemption. Along with the increase in the standard deduction, the new Tax Bill eliminates the personal exemption deduction that was $4,150 per eligible person in 2017.
5. Expanded Child Tax Credit. The child tax credit increased from $1,000 to $2,000 in 2018 for those children under age 17. In addition, $1,400 is refundable meaning you could still receive up to $1,400 per child even if you did not pay any federal income taxes.
6. Tax Credit for Non-Child dependents. The Tax Bill added an additional tax credit of $500 for other dependents such as children age 17 and over and/or grandparents that may reside with you as an example.

Here’s a longer discussion of some of the key aspects:

Prenuptial Agreements

For couples who previously drew up prenuptial agreements, the outcome should they divorce is more uncertain. It is common in prenuptial documents for lawyers to insert language calculating alimony payments based on years of marriage and a clause saying alimony payments are deductible for one spouse. A question exists: will these clauses hold up in 2019 and beyond. Can you rely on it? In the absence of guidance from the I.R.S., a document providing for deductible alimony payments might not be honored, if alimony is no longer deductible. A married couple might want to consider renegotiating the agreement, even if it might unsettle the marriage.

Business Valuation

But, there are reasons to delay divorce. Other tax-driven divorce issues require a more careful eye. One is how a private business should be valued. This has always been an important component of divorce settlements. But, the new tax law increases the cash flow of certain pass-through entities — businesses where the taxes on the earnings are paid by the owner, not the company — in a way that raises their value. Because of increased cash flow and reduced taxes, a business could drastically increase in value. Figuring this out will require a more complex expert evaluation, increasing the cost and time. A business is almost always the most contested asset in a divorce, with many of the numbers in a settlement derived from its value. One of those numbers is child support, which is generally negotiated only once. This raises the importance of getting it right. The higher cash flow, if any, from the change in the tax law will not be known until the business owner files a tax return next year.

Other

Child support has always been nondeductible and remains so. But some practitioners are reminding their clients to look closely at the tax benefits of different assets. For instance, couples should weigh receiving a house as against a spouse’s retirement plan. The spouse who has custody of the children wants the house. But the new tax changes, particularly in states where deductions for high state and local taxes have been curtailed, may make the family home less valuable in the long run than a retirement account with a similar value. Spouses who get the retirement account will not be able to draw down on it until age 59½, but they will have a more solid financial base in their later years. And by opting for the retirement account over the house, they can avoid paying those property taxes. Examining how the parents are going to pay for a child’s education is also important. Given the changes in the tax laws, 529 college savings plans can now be used for private high school. They used to be limited to postsecondary and college education. This can help with school costs sooner, but it presents several problems. One problem is whether enough money will be left over to pay for college. Also one must make sure spouses don’t count the assets in a 529 plan toward their contribution to school or college. The new tax law adds a new level of complexity to the overall agreement.