What affects could the proposed tax changes have on divorced couples?
While there is still a lot of unknowns surrounding the proposed tax changes, we wanted to share with you some of the ways that it could affect our divorcing clients.
In Trump’s originals tax plan, he proposed getting rid of the Head of Household Filing status. However, both the Senate and House versions maintain it so it’s unlikely that it would go away. This is good for many of our clients, because when they get divorced if they provide more than half of the care of at least one child in a year they can qualify to file for Head of Household which is a more beneficial tax bracket than Single. This allows our clients to maximize the income they hold on to and are able to better care for their children.
Alimony (Spousal Support) Deduction
Under the current House and Senate plan, it eliminates the deduction for alimony payments. While to many this might not seem like a big deal, this is often a tool that we use with our clients to allow them to maximize their income. Going from supporting one household to two households is often very difficult for divorcing couples. It costs much more and few people have twice the amount of monthly income they need. By utilizing the alimony deduction, clients are able to maximize their monthly income they have to live. Spousal Support (or alimony) discussions are often the most difficult part of the conversation and by eliminating this deduction it may make it even harder for clients to reach an agreement. If this does pass the changes would take effect January 1 and apply to divorces finalized after 2017.
The House plan limits the mortgage interest deduction to mortgages up to $500,000 for new mortgages. The Senate plan allows the deduction to remain up to $1 million but eliminates it for home equity loans. While this might not seem like an issue in many areas of the country with housing prices on the rise here in San Diego this could affect many of our clients who live in more expensive areas of the county and have mortgages that are over that limit. While it only applies to new mortgages, often couples are selling and purchasing new homes or need to refinance to remove the other spouse.
Child Tax Credit
The Senate plan increases the Child Tax Credit from $1,000 to $2,000 and increases the income level from $110,000 to $1 million. The House plan raises the Credit to $1,600. This would allow the parent that is taking the child tax credit a greater benefit in this area than previously and would allow situations where current it doesn’t make sense for one parent who does earn over the limit to take the tax credit.
Financial Planning Mediation
Stay ahead of tax changes impacting divorce. Contact West Coast Family Mediation Center about financial planning services to empower you to navigate the proposed tax reforms with confidence.
by: Amanda Singer