When Congress passed the Tax Cuts and Jobs Act of late 2017, the reforms made in the tax code related to alimony have changed how people are going through divorce approach this topic. The tax law took effect on January 1, 2018, and has changed the tax brackets for those of you who have filed as head of household. Importantly it has also eliminated the deductions that a person could apply for attorney's fees, court costs, financial planners, as well as for alimony payments made to an ex-spouse.
For alimony purposes, the tax law mandated that for all final decrees of divorce signed after December 31, 2018, the deduction for alimony will no longer be allowed. Some have argued that these changes can have a dramatic effect on you and any other people who plan on getting divorced in the future. I would point your attention to any premarital or marital property agreements you and your spouse have signed that cover spousal maintenance or contractual alimony. The reason I do so is that those agreements may need to be altered or amended in consideration of the changes made to the tax laws that went into effect in 2018.
What's the deal with filing head of household post-2017?
A significant change that the tax law signed into law during December 2017 was that single parents who file head of household on their tax return and itemize their deductions could no longer file under the old tax bracket than they were accustomed to. If you have primary custody of your kids (assuming that they live with you more than 50% of the days out of a year), then you are bumped up a tax bracket now as long as you make at least $51,800.
When can you file your taxes as head of household?
If you are unmarried on the final day of a calendar year, you can file as head of household on your taxes. For example, if you filed for divorce earlier this year in 2020 and dragged on for longer than you would like, it is still possible to file as head of household on your taxes if you get divorced by December 31, 2020.
Next, your home has to be the leading home where your children live during the year. Your kids couldn't have lived most of the year with your mother, for example, and still allow you to file as head of household on your taxes. Your kids needed to be in with you at your home for at least 50% of the days of 2020 in the above hypothetical situation.
Third, you had to have paid most of the costs of maintaining the house for at least half of the year. Rent payments, the mortgage, taxes, insurance, utilities, and food are all costs that go into this analysis. For most single parents, this will not be a problem. Even if you receive child support payments, the reality is that those monies are usually relatively modest compared to the actual costs of raising a child daily.
Before 2018, if you could file your taxes as the head of household, you would be eligible to take advantage of a lower tax bracket compared to merely filing as a single person. Single parents who have primary custody of kids bear a significant burden to their budgets despite receiving child support. When you consider that for two kids, 25% of your ex-spouse's net monthly income is all you would be paid in support in most cases, that is not a lot in terms of financial help.
This is fine for most parents who want to become the primary conservators of their kids. When you think about it, you didn't push for that right in your divorce so that you could potentially have an advantageous tax filing position. Instead, you believed that the kids' best interests were met better by caring for the kids primarily than your spouse. Any tax advantages were, at best, a secondary consideration that you probably made.
The reality is that as of a couple of years ago, the new tax law took away the tax treatment that you could take advantage of as filing head of household. If you itemize your deductions, the best you can do is deduct around $1,500 per year. Before the most recent changes in the tax code, your benefit as filing head of household would have been closer to $5,000.
Standard deductions go up for parents who file as head of household.
The standard deduction has increased for parents who wish to file as head of household, however. Previously the standard deduction for parents in this position was $12,000. Now it stands at a beefier $18,000. As I just mentioned, however, if you are one of the few people who itemize their tax deductions in a given year, this benefit will be meaningless to you. Single parents with primary custody of their kids like you are that in 2026 the head of household status for tax bracket will go back to the way it was formerly.
A hypothetical example to explain the points we have made thus far regarding the standard deduction
Talking about taxes, alimony, and changes in federal law can be a little confusing. I don't want us to discuss this subject further until we take a break and go over a little hypothetical example to illustrate better the points that I have been trying to make thus far.
Suppose that you and your husband have three children together and are now getting a divorce. You are a teacher at the local high school, and your husband works for a national airline. Therefore, it would make sense that you be the parent who is named as the primary conservator of your kids. The reason why it makes sense is that your husband travels a great deal of the time for work and is home in Houston only on the weekends.
As far as your incomes are concerned, both of you earn about the same amount of money every year- right at $100,000 after deductions. You typically take deductions for mortgage interest payments on your $200,000 loan and around $1,000 for charitable donations made to the church and other nonprofits. Your tax bracket as a single individual will be 24%, as will your husband.
What happens if you want to file as head of household on your taxes moving forward since you will be the children's primary caretaker? The reality is that for your situation, bearing in mind your income, only the first $51,000 or so of your payment will be impacted. So, the reality is that your financial situation may be somewhat different now than had your divorce been finalized before December 31, 2018.
A hypothetical example to explain the points regarding the itemized deduction changes
You and your spouse got divorced in 2017. Your gross income was $100,000 that year, and you also accumulated around $20,000 worth of fees and expenses related to the divorce that could ordinarily itemize as deductions for that year. The law at that time is that so long as the costs amount to more than 2% of your gross income, they could be deducted. Once you subtract $2,000 from the $20,000 number I mentioned above, you have $18,000 leftover to itemize and deduct.
Compare this situation to what you would have been in store for had your divorce finalized in 2018 rather than in 2017. You would not have been able to deduct any of the legal fees or court costs due to the tax law changed in December 2017 and went into effect on January 1, 2018. Fortunately for you, your divorce likely costs you less money than other folks getting divorces in the United States through the year 2025.
What about alimony deductions?
Unlike child support payments, spousal maintenance and contractual alimony (as they are known in Texas) are typically tax-deductible for the ex-spouse who makes the payments. This means that if you were the spouse ordered to make spousal maintenance payments in your final decree of divorce, you do not need to itemize your deduction to be a beneficiary of these tax advantages.
The alimony is taxable in the year where your ex-spouse receives the money. Here, I need to point out that the federal tax laws treat spousal maintenance, contractual alimony, spousal support differently. Sometimes you may hear attorneys and even judges refer to these concepts like they are the same thing. In some instances, they may be substituted for one another if you are having a general discussion on this topic. However, in this instance, we need to differentiate between them before we can go any further.
Spousal maintenance does not always qualify for the deduction, however. Just so we are clear: in Texas, spousal maintenance is payments ordered by a judge to be received by your ex-spouse as paid by you after your divorce has been finalized. These payments can be collected for many reasons, but the bottom line is that your ex-spouse must is unable to meet her minimum reasonable needs without the assistance of these maintenance payments.
A judge must have ordered the spousal maintenance payments to be eligible. Next, the expenses must be made in cash and not in the property or something else. You cannot still reside with your ex-spouse in the same household (you must have your home to maintain, basically). Finally, the divorce decree must not state that spousal maintenance payments are to satisfy any other purpose than supporting your ex-spouse financially.
That was how things were in the old days. Now, as long as your divorce was finalized after December 31, 2018, that deduction for spousal maintenance is no longer available to you. As we talked about at the beginning of today's blog post, this could throw premarital and marital property agreements into turmoil if they were signed before December 31, 2018. Still, the divorce would not become final until after that date.
These spousal maintenance payments are in jeopardy of not qualifying for the alimony deduction if your divorce was finalized after 12/31/18. This is true even if your marital or premarital property agreement was signed well before this date. You should look at your premarital or marital property agreements if you are not yet divorced and make changes as you and your attorney see fit.
Final thoughts on the changes to the tax code regarding head of household status and alimony
The past couple of years have seen people just like you handle the changes that have been made to the tax code regarding alimony and head of household filing status. Divorces may become more expensive for Texans as a result, although we probably need to wait a few years to get a better determination on that. Either way, with changes in the tax code, your divorce may be negotiated differently now if any of these subjects impact your case. Having an experienced family law attorney by your side to assist you is now more crucial than ever.
If you have any questions about the information that we discussed in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week here in our office. These consultations can be an excellent opportunity for you to ask questions and receive specific feedback about your particular case. Thank you for your time and attention, and we hope you will join us again tomorrow on our blog to learn more about our office and how we can help you and your family.