As this is written, the House and Senate this week are scheduled to vote upon a conference report of both houses of Congress which will “reform” tax law in a major way for the first time since the Reagan administration. In order to secure passage, Congress needed to find some revenue enhancements to offset the tax reductions allocated to corporate and estate tax payers.
As we predicted in November, alimony as a tax deduction to the payor and an element of income to the payee, appears to be one of the revenue enhancers Congress decided to keep in the final bill, with one twist. The House version ended alimony as a deduction for any decree or agreement formed after December 31, 2017. The Senate version of the reform bill did not change the rules relating to alimony. Thus, we anxiously awaited what would come out of the conference report published on Friday, December 15, 2017. The 1000 page report can be found at http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf . Make certain you have your tax code with you when you start to read as the conference report is only a description of the amendments without the Code.
We did this. In a nutshell, the Conference Committee adopted the House version but delayed implementation for one year. Therefore, if you are negotiating or litigating a divorce case and you conclude your matter by agreement or decree before December 31, 2018 (a year from now), the old alimony rules apply. But, beginning with tax year 2019, any new decree or agreement providing for alimony will be tax free to the recipient and nondeductible by the payor. As Steve Hurvitz, current head of the Pennsylvania Bar Association Family Law Section observed when he read the bill; “There will be a lot of deals made in 2018.”
The effect of this and other changes in the Tax Code “on the ground” in Courthouses across the state is going to be seismic. The current support guidelines have deductibility “baked into” the formula. So, Congress is ripping up those rules. Other adjustments to gross income that are used to calculate net income for purposes of support are similarly affected. Mortgage interest is capped at $750,000; state and local tax deductions (including real estate taxes) are also capped at $10,000 ($5,000 if filing separate). Personal exemptions disappear. Home equity loans are no longer deductible. All miscellaneous deductions (e.g., accounting tax prep fees) are eliminated.
The standard deduction is now:
Individuals: $24,000 if married joint
Heads of Household: $18,000
Single and Married Separate filers: $12,000
Indexing rates and other tax items (dependency exemption ) for inflation has been repealed. The child tax credit is elevated to $2,000 per qualifying child and would not phase out until $200,000 for non-joint filers and $400,000 for joint filers.
One thing would seem to be clear. If you have a visit to Domestic Relations or a court proceeding in support scheduled for early next year, none of the algorithms in the support calculating software are going to provide a reliable result. Perhaps the largest adjustment relates to income paid through a qualified partnership, “S” corporation or sole proprietorship. Twenty (20%) of that qualified income is deductible. The practical effect of what is or is not deductible is going to be the subject of IRS created regulations.