Tax law may increase cost of divorce

People in California who are considering divorce might want to examine how the Tax Cuts and Jobs Act that passed in 2017 will affect their finances. For example, alternating exemptions for children with IRS form 8332 will no longer be possible. Instead, divorced parents who have only one child will have to decide who can claim the head of household exemption.

The person who claims the HOH exemption can also take the Child Tax Credit. It is unclear whether the Child Tax Credit can be traded because the IRS has yet to issue guidance on the matter. Couples may want to write the divorce agreement in a way that is flexible enough to allow this trading.

Alimony is another issue to take into consideration. For decades, the person paying alimony could deduct it while the recipient paid taxes on it. Starting in 2019, alimony will no longer be tax deductible or tax payable. While this means alimony payments will not have to be structured in a way that is tax compliant any longer, there are several disadvantages. Paying will be a greater burden, and it is likely that alimony amounts will be reduced. Unlike other elements of the TCJA, these alimony rules are not due to sunset in 2026. It is unclear what will happen, so divorce agreements need to be flexible enough to allow for changes.

Couples may want to work with their attorneys to try to negotiate an agreement that deals with property division, child custody and support and alimony. It is often better for people to be able to reach an agreement through negotiation instead of going to court because it can save money and time and give couples more control over the final agreement. Given the uncertainty of some elements of the tax law, couples may need to renegotiate some parts of the agreement even after the divorce is final.