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Effects of the TCJA on alimony, child tax exemptions

The 2017 passage of the Tax Cuts and Jobs Act by Congress means that the cost of divorce may rise for some couples in Wisconsin. The act changes how people claim children on their taxes and eliminates alimony from tax considerations altogether.

Parents used to be able to take turns claiming their children as exemptions, but this will no longer be possible. Instead, there will be a significant deduction for claiming head of household. The head of household must be single, have a dependent in the home more than 50 percent of the time and pay over half of the expenses in the household. The child tax credit is also available to the head of household. The IRS has not issued a regulation to clarify whether the child tax credit is tradeable, but parents can include as part of their divorce agreement that it is tradeable if allowed by regulations.

Alimony payments will probably be lower since they are no longer tax-deductible. This is likely to result in less money for the recipient even with the necessity of paying taxes on the amount received eliminated. Furthermore, this is one part of the tax act that is not supposed to sunset in 2025. It may be necessary to write divorce agreements that allow flexibility in the event of more tax changes.

Divorce and property division can be complex and expensive even without accounting for these tax changes. In some cases, couples may be able to reduce some of that expense by negotiating the divorce settlement. However, in doing so, they should make sure that they fully understand the value of certain assets. For example, some retirement accounts might have a reduced value if taxes must be paid on any distributions while the family home has costs such as upkeep, insurance and property taxes.

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