On December 22,2017, President Trump signed the Tax Cuts and Job Acts, sweeping legislation that impacts the entire country in diverse ways. Under the law, the corporate tax rate is reduced from 35% to 21%. Although there remain seven income tax brackets, income ranges have increased, and each new tax bracket has lower tax rates. The standard deduction is nearly doubled from $12,700 to $24,000 for married couples and from $6,350 to $12,000 for individual filers. The child tax credit is doubled form $1,000 to $2,000, $1,400 of which is refundable. A multitude of other provisions are included in the legislation including deductibility of mortgage interest and deductibility of state and local income taxes.
Part of the legislation has a direct effect on divorcing couples. The current tax code provides that the payor of maintenance (alimony) may deduct the amounts paid to the recipient. The recipient claims the maintenance (alimony) received as income. The Tax Cuts and Jobs Act provides that for any divorce action concluded after December 31, 2018, maintenance (alimony) payments will no longer be tax deductible to the payor and will no longer be included as income by the recipient. Specifically, the Act will apply to maintenance (alimony) payments that are required under final divorce judgements that 1) is executed after December 31, 2018 or, 2) is modified after that date if the modification specifically states that treatment of maintenance (alimony) payments now apply under the Act.
The significant change in treatment of maintenance (alimony) payments gives rise to a number of important issues in divorce actions in Wisconsin. The payor of maintenance (alimony) will wish to have their action resolved on or before December 31, 2018 so as to ensure deductibility of maintenance (alimony) payments made. On the other hand, the recipient may have a significant incentive to put off finalizing the divorce action until January 1, 2019 or thereafter, given that the maintenance (alimony) payments will not be taxable to the recipient.
Divorcing couples and their attorneys would do well to understand the impact that this may have on their post-divorce lifestyle. If you have questions about this issue or any other divorce-related issue, contact the family law attorneys at Hammett, Bellin & Oswald, L.L.C. for a consultation.