10 Questions by Attorney Debbie Smith of Watertown, Massachusetts regarding divorce issues and paternity cases for David Goodman, CPA in light of the federal tax law

The Tax Cuts and Jobs Act law that was signed by the President on December 22, 2017, made changes to the way family law lawyers have been working on divorce and paternity cases. To find out how to best to save people money going through divorce or pursing a paternity matter, Attorney Smith has drafted some questions for David H. Goodman, CPA/ABV/CFF, CVA to provide answers (which he has answered in blue below) in light of this tax law. Many clients have sought dependency exemptions, deductions for alimony and other ways to save money before the tax law was signed. However, times have changed and new ways to resolve divorce and paternity cases will have to be sought.  This article dated February 23, 2024, is an update of the article on February 8, 2019.

10 Questions by Attorney Debbie Smith of Watertown Massachusetts regarding divorce issues and paternity cases for David Goodman, CPA in light of the new federal tax law

1. Are the dependency exemptions for parents still available for the federal tax returns in 2023 and 2024?

The personal exemptions beginning with tax year 2018 are suspended between 2018 and 2025. They are reinstated in 2026. The exemption previously was $4,000 reduction in income per exemption. An example of the tax savings for someone with a 25% marginal tax rate, meant a reduction in tax of $1,000.

2. If there are no dependency exemptions in 2023 or 2024, are there any other tax savings that a parent could seek on their federal income tax return instead? Also, what is a child tax credit and how much savings could a parent receive?

For 2023, there is a child tax credit for parents who have children under the age of 17. The credit is $2,000 per child. For a single parent, their income must be less than $200,000 to claim this child tax credit and less than $400,000 if filing jointly.  For 2024, it is proposed that this credit be adjusted for inflation. Congress is also considering raising the refundable amount of the credit.

 

3. Are there any other tax benefits post pandemic in 2023 or 2024 that either parent can get for their child or children?

 

Taxpayers with dependents who don’t qualify for the Child Tax Credit may be able to claim the Credit for Other Dependents. They can claim this credit for other dependents in addition to the Child and Dependent Care Credit and the Earned Income Credit. The maximum credit amount is $500 for each dependent who meets certain conditions: Dependents of any age, including those who are age 18 or older, dependents who have Social Security numbers or Individual Taxpayer Identification numbers, dependent parents or other qualifying relatives supported by the taxpayer, and dependents living with the taxpayer who aren’t related to the taxpayer.

The credit begins to phase out when the taxpayer’s income is more than $200,000. This phaseout begins for married couples filing a joint tax return at $400,000.

A taxpayer can claim this credit if:  they claim the person as a dependent on the taxpayer’s return, they cannot use the dependent to claim the child tax credit or additional child tax credit, and the dependent is a U.S. citizen, national or resident alien.

 

4. Can a parents share dependency or child tax credits every other year in a Separation Agreement for a divorce case or an Agreement for a paternity case?

 

Yes.  There are specific guidelines covering this. The custodial parent generally claims the qualifying child as a dependent. The custodial parent is the parent with whom the child spends the greatest number of nights. If the number of nights is the same, then the custodial parent is the one with the higher income.  If the noncustodial parent wishes to claim the qualifying child as a dependent, they must receive a completed Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. This applies to all benefits related to the child.

5. Could a payor still get a tax deduction on the federal or state income tax return if the payor paid money for alimony to an ex-spouse in 2023 and/or 2024?

It depends on the date that a separation agreement filed. The tax act makes alimony not deductible by the payer and not taxable to the recipient for separation agreements for a divorce case entered into after December 31, 2018. This appears not to apply to modifications of existing agreements made after December, 31, 2018, unless the modification specifically states it will apply. Accordingly, if alimony is deductible to the payor and taxable to the recipient, for separation agreements in divorce cases entered into before January 1, 2019, they are still deductible. Effective January 1, 2022, alimony is not deductible to the payer or taxable to the recipient in Massachusetts.

6. What are the recapture rules regarding federal income taxes and will they apply after 2018? Who will it apply to?

After 2018, since alimony is not deductible, the recapture rules don’t apply. Neither do the concerns about alimony being considered deemed child support. The good news is this provides a lot of room for creatively structuring support payments. Alimony may be front loaded (paid up front) or reduced with contingencies related to a child, such as if the child graduates from high school or college.

7. Are dependency exemptions and alimony deductions still allowed on the Massachusetts state income tax returns in 2023 and/or 2024?

Massachusetts allows a $1,000 exemption for each qualifying dependent and a personal exemption of $4,400 if filing single or married filing separately $6,800 for head of household, and $8,800 for filing jointly.

 

8. Can the two parties seeking a divorce still claim the property taxes and state income taxes for their marital home on their federal income tax returns in 2023 and/or 2024?

Under the tax law, beginning in 2018, the maximum deduction for state and local taxes is $10,000 ($5,000 for married filing separately). It does not matter whether the tax is a property tax or income tax. This creates a hidden marriage tax. Single persons also may deduct up to $10,000 in state and local states.

For 2023 the standard deduction is now $7,700 for married filing jointly, $20,800 for head of household, and $13,850 for single. This is adjusted for inflation, and for 2024, the standard deduction will be $29,200 for married filing jointly, $21,900 for head of household, and $14,600 for single. However, this increase in the standard deduction changes and reverts in 2026 back to the amounts in place before the new tax law.

9. Since homes in Massachusetts have gone up in value so much recently, does the $250,000 credit per person still apply if two people sell their marital home so they don’t have to pay capital gains taxes on that money if their house sells for a lot more than they paid for it?

There is no change to the exclusion on the sale of the primary residence. However, there is a change to what interest can be deducted. Starting in 2018, the deduction for interest expense on a residence is limited. For loans entered into after December 15, 2017, the allowable maximum debt is $750,000 – down from $1,000,000 and home equity interest is no longer deductible.

 

10. What are the rules for paying capital gains taxes if two married people own real estate in Massachusetts, they get divorced, one moves out, one keeps the property and then the property is sold in 3-5 years period of time?

  When a primary residence is sold, there is a $250,000 exclusion from the capital gain. The capital gain is the selling price less the cost basis. If two people jointly owned the house jointly, then each is entitled to a $250,000 deduction for a total reduction of $500,000. If the two people get divorced then special rules apply.

Each person must have used the home as their primary residence for a total of 24 months in the previous 5 years. If you were separated or divorced prior to the sale of the home, you can treat the home as your primary residence if: you are a sole or joint owner, your spouse or former spouse is allowed to live in the home under a divorce or separation agreement, and uses the home as their main home.

The following is from the Internal Revenue Code, “Solely for purposes of this section, an individual shall be treated as using property as such individual’s principal residence during any period of ownership while such individual’s spouse or former spouse is granted use of the property under a divorce or separation instrument.”

This is a complicated area and you should consult a knowledgeable tax advisor to make sure you will qualify for the exclusion.

Thank you David for your thoughts on this changing tax climate.

This article is not meant to provide legal advice by Attorney Debra L. Smith or tax advice by David H Goodman, CPA. It is meant for informational purposes only. Both Attorney Smith and Mr. Goodman state that one should seek legal and accounting advice on their specific case.

2024 Copyright Debra L. Smith and David H. Goodman, CPA. All rights reserved.

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