Due to changes put in place by the Tax Cuts and Jobs Act, divorce could soon be more expensive for California couples. This act changed both how exemptions for children are claimed and the tax status of alimony. Experts say it ultimately could mean less money for some ex-spouses.
Instead of a child tax exemption, one parent will be able to claim a Head of Household deduction. To claim this, the child must live with the parent more than half the time. Furthermore, the parent must be single and pay over 50 percent of all expenses in the household. In addition, the HOH can take the child tax credit. The IRS has not yet issued guidance as to whether this tax credit is tradable. Couples may want to write a divorce agreement that allows for this if IRS regulations are clarified.
Alimony has traditionally been tax-deductible for the payer. This will change for all divorce agreements that are signed starting in 2019. As a result, it's anticipated that this will lead to lower alimony payments overall even though the recipient will not have to pay taxes on the amount. While this is not due to sunset in 2025 like many other parts of the tax act, it may still change. Therefore, a divorce agreement may need to acknowledge that.
There are other tax considerations divorcing spouses should keep in mind during the property division process. For example, an ex might be in a different tax bracket after divorce. Selling some property could result in a capital gains tax. Certain assets, such as 401(k)s and pension plans, need a complex document called a qualified domestic relations order to be split without incurring penalties and taxes. For some couples, instead of splitting all assets, a better solution may be for each to take certain assets in full.