The March 29, 2016, edition of Delaware Business Times included my article headlined “If there’s one sure thing in divorce, it’s taxes.” The article outlined some of the ways a divorce may affect an individual tax return. Those areas included alimony, dependency exemptions and itemized deductions. The impact of divorce on taxes shifted dramatically on Dec. 22, 2017, when President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. Changes include:
In Delaware, alimony may be awarded to a dependent spouse who is unable to support himself or herself. The length of the marriage determines the duration of the eligibility period. Delaware law provides that a person may be eligible for alimony for up to half the length of the marriage if the parties were married for less than 20 years. If the parties were married for 20 years or more, there is no statutory time limit.
Prior to the TCJA, alimony was taxable to the recipient and deductible by the payer. In many cases, the payer is in a higher tax bracket than the recipient. In those cases, the income shifted to the recipient spouse as alimony and was taxed at a lower rate. The payment of alimony resulted in an overall combined net tax savings. The TCJA, however, eliminated the shift of income. The TCJA provides that alimony paid pursuant to a divorce or separation instrument executed after December 31, 2018 will not be tax-deductible to the payer or taxable to the recipient. Any divorce or separation instrument signed or effective prior to Dec. 31, 2018, but modified thereafter, may retain its tax-deductible status depending on the language of the modification.
Prior to the TCJA, parties could potentially deduct some legal expenses as miscellaneous itemized deductions, subject to the 2 percent-of-adjusted-gross-income floor if the expenses were paid or incurred for the management, conservation or maintenance of income-producing property or for the production of income. Therefore, expenses attributed to producing or collecting alimony may be deductible. With the elimination of the alimony deduction, the TCJA eliminated this potential deduction as well.
Prior to the TCJA, parents could claim a dependent child exemption, the effect of which was to reduce their taxable income. The IRS previously specified that a child who qualifies to be claimed as a dependent could typically be claimed by the parent who has primary placement (the most overnights) of that child during the calendar year. If the child spent an equal number of overnights with each parent, then the parent with the higher adjusted gross income was allowed to claim the dependent child.
Prior Delaware Family Court decisions held that the exemption was part of the marital estate and could be awarded in a divorce. As a result, parties could and did litigate the exemption in a divorce action. The TCJA eliminated the dependency exemption.
These changes may affect a divorce action in many ways, both on large and small scales. Divorced or divorcing spouses would benefit from consulting with tax advisers and legal counsel early in the process to ensure that they are well informed with regard to their specific questions.
Leslie B. Spoltore is a partner with Obermayer Rebmann Maxwell & Hippel LLP and a member of the Litigation and Family Law Departments. She can be reached at [email protected] or (302) 274-3062.