President Donald J. Trump signed the Tax Cuts and Jobs Act on December 22, 2017. This is the most expansive reform of the U.S. tax code since 1986.
Major changes include the following:
- The corporate tax has been cut from 35 percent to 21 percent.
- The standard deduction is nearly doubled.
- Personal exemptions have been eliminated.
- The child tax credit is nearly doubled.
The tax reform will have a significant impact on family law practitioners. Previously, alimony payments to a former spouse were treated as a tax deduction for the payor and as income to the recipient. As a result, “income was often shifted for a recipient in a lower tax bracket, resulting in lower combined taxes paid.” The tax deduction was seen as a divorce subsidy that allowed attorneys to craft settlements in which it was possible to make larger alimony payments at a lower after-tax cost to the payor. According to the IRS, nearly 12 million tax returns claimed a deduction for alimony payments in 2015.
Beginning with divorce decrees entered on January 1, 2019, alimony cannot be deducted and is no longer taxable to the recipient. Family law attorneys previously viewed the tax deduction as a bargaining tool when determining alimony. Now, attorneys fear this will create more litigation as spouses in higher tax brackets have more leverage to argue for lower alimony payments. Additionally, more divorces may be filed and concluded before January 1, 2019, to avoid the tax deduction changes.
For a more detailed discussion on the tax considerations of a divorce, review chapter 18 of Michigan Family Law.