How the Tax Cuts and Jobs Act Affects Divorce

For couples in North Carolina, the Tax Cuts and Jobs Act that passed at the end of 2017 may make divorce more expensive. One change is that parents will no longer be able to take turns claiming children as exemptions. Instead, one parent can claim a head of household (HOH) exemption.

However, it is unknown if the Child Tax Credit, which can also be used by the parent claiming HOH, will be tradeable. The IRS has yet to issue guidance. People may want to include enough flexibility in their divorce agreements for it to be traded if that becomes legal.

One of the biggest changes will affect alimony for all divorces that take place in 2019 or later. Alimony has long been tax deductible for the payer and tax payable for the recipient. This will no longer be the case starting in 2019, and experts anticipate that the result will be lower alimony payments overall. Agreements that are completed before the end of 2018 will follow the old tax rules, so some couples may want to make an effort to finish an agreement before the year’s end. Alimony is also one provision of the TCJA that does not sunset after 2025. Couples who complete an agreement after 2018 may want to include provisions that allow for changes if necessary.

Negotiating a divorce agreement can be difficult even for couples who do not have to deal with the uncertainty around alimony and tax issues relating to children. For example, there may be tax considerations that are unaffected by the TCJA. Without a document known as a qualified domestic relations order, there will be taxes and penalties on 401(k)s and pensions that are divided. A distribution from an IRA in a divorce will need to be rolled into another IRA to avoid taxes.

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