Divorce in Pennsylvania: Impact of new tax law.

There are many considerations to take into account when going through a divorce. One important factor to review during divorce negotiations are taxes. Although the need to discuss tax obligations during divorce is not a novel concept, the role of taxes has changed. The recent Tax Cuts and Jobs Act (TCJA) led to sweeping tax reform. Some of these changes will directly impact those going through a divorce.

Impact #1: Changes to alimony.

The TCJA impacts alimony. As noted in an earlier piece, alimony is allowed in Pennsylvania. The state uses a relatively traditional approach to alimony and offers courts broad discretion over these awards. However, the number of alimony conflicts these courts review may soon decline due to this new tax law.

Those who finalize a divorce in 2019 or later are no longer able to deduct alimony payments from their individual tax returns. In the past, the ability to claim this deduction served as a valuable negotiating tool. In the future, this tool is no longer available. This could result in a reduction in the number of couples that agree to spousal support within their divorce settlement agreement.

This change will have the greatest impact on divorces for those with high incomes, generally defined as those with a net annual income of $600,000 or more. Those who fall within the highest tax bracket often use this deduction to lower their overall tax obligations. Without the incentive to receive this tax break, these couples may no longer consider paying spousal support.

It is important to point out the change goes into effect on divorces finalized in 2019. Any divorce finalized in 2018 still qualifies for the current tax law. This means couples who finalize their divorce this year can still claim alimony payments as a deduction on their tax returns.

Impact #2: Changes to the child tax credit.

The TCJA will also impact the child tax credit. The maximum child tax credit was $1,000 in 2017. This credit will double to $2,000 for any qualifying child under the age of 17. The new tax law also changed the income levels that are required to receive this credit. In the past, those who filed as an individual that received over $75,000 in income were unable to receive this credit. The new law raises this threshold to $200,000. Thus, more individuals could take advantage of this credit. As such, it is wise to take this change into consideration when negotiating which parent gets to claim the child or children as dependents for tax purposes.

These are just two ways the TCJA will impact divorce negotiations. Any couple going through a divorce is wise to seek legal counsel to help better ensure these and other considerations are addressed during the divorce proceeding.