New Federal Tax Law Will Have Substantial Impact on Divorces in Wisconsin

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The Tax Cuts and Jobs Act of 2017 made sweeping changes to the U.S. Internal Revenue Code. While many of these changes have garnered significant publicity, many others have flown under the radar. Falling into this latter category are a number of changes that have the potential to significantly impact the divorce process in Wisconsin.

How Might the Tax Cuts and Jobs Act Impact Your Divorce?

While every divorce is different, there are a number of ways in which the Tax Cuts and Jobs Act has the potential to significantly affect divorces in Wisconsin. Some of the most-notable effects of the statute include:

1. New Tax Treatment for Alimony

Technically referred to as “maintenance” in Wisconsin, alimony is a significant component of many divorces. Prior to the Tax Cuts and Jobs Act, a former spouse who paid alimony was entitled to deduct these payments from his or her income and the recipient was required to report alimony payments as taxable income. Under provisions of the Tax Cuts and Jobs Act that take effect on January 1, 2019, this tax treatment is reversed.

For divorces finalized after December 31, 2018, alimony payors will no longer be entitled to deduct their payments and recipients will no longer need to report their payments as taxable income. Since the ability to deduct payments often provided an incentive for high-earning spouses to agree to alimony in divorce negotiations, this change in the law is going to change the way that spouses on both sides approach their divorce. However, it is important to note that divorces finalized prior to next year will be grandfathered under the existing tax laws. So spouses who are currently going through a divorce still have some time (though not much) to avoid the Tax Cuts and Jobs Act’s alimony rules.

2. Elimination of Personal Exemptions

The Tax Cuts and Jobs Act eliminates personal exemptions for income tax filings from 2018 through 2025. These exemptions provide tax savings for filers with dependent children. And during the divorce process, it has traditionally been common for parents to negotiate who would be entitled to claim personal exemptions for their children. However, with these personal exemptions not being available for the next several years, divorcing parents will need to find other ways to achieve equitable resolutions.

3. Doubling of the Child Tax Credit

While the Tax Cuts and Jobs Act eliminates personal exemptions, it doubles the child tax credit to $2,000 and provides that up to $1,400 of the tax credit is refundable. Although this is noteworthy for divorcing parents, it is not likely to have as significant an impact on the divorce process as the elimination of personal exemptions due to the fact that the credit is only available to a parent who lives with their children for at least six months out of the year.

4. Elimination of Relevant Itemized Deductions

For individuals who have traditionally itemized their deductions, the Tax Cuts and Jobs Act eliminates a number of itemized deductions that are relevant to the divorce process. These include:

  • Legal fees paid to obtain alimony
  • Tax preparation fees
  • Home equity loan payments (except for “acquisition indebtedness”)
  • Mortgage interest on loans over $750,000 (for loans originated after December 15, 2017)

However, alongside its elimination of these (and other) itemized deductions, the Tax Cuts and Jobs Act is also increasing the standard deduction to $12,000 for single filers and $18,000 for heads of household (compared to $6,500 and $9,550 under the previous version of the Internal Revenue Code). So, divorcing spouses will need to determine whether it is most advantageous to itemize or take the new standard deduction in light of the financial aspects of their divorce and the changes in the law.

5. Increased Business Valuations

With the reduction in the corporate tax rate from 35 percent to 21 percent and with the creation of a qualified business income deduction of up to 20 percent for pass-through entities, some privately-held businesses will see a substantial increase in their cash flow. This may translate to a substantial increase in their valuation during the divorce process. For private business owners (and spouses of private business owners), arriving at an accurate valuation is a crucial component of the property distribution process.

Weighing Tax Considerations During the Divorce Process

Of course, while tax considerations are important, they are by no means the only factors that should drive your decision-making during your divorce. From child custody and parenting time considerations to protecting your retirement and assets with sentimental value, there are numerous issues that are likely to influence your approach to your divorce. The key is to make informed decisions with your long-term best interests in mind, and this requires careful attention to the legal, financial, and practical implications of various potential outcomes.

For additional information about other factors that are likely to play a role in your divorce, we encourage you to read:

For most couples, the divorce process ends with the execution of a settlement agreement. While going to court is an option, it is often an expensive one and it is one that takes control out of the spouses’ hands. By working with experienced legal counsel, you can not only ensure that you are making decisions based upon complete and accurate information, but also that you are pursuing an effective strategy for resolving your divorce as amicably and cost-effectively as possible.

Disclaimer: This Article Is Not Legal Advice.

Never rely on an article for legal advice as the law frequently changes, information may not be accurate, there may be exceptions to a rule, and reliance may be detrimental. Always consult one of our experienced attorneys for competent, current, and accurate legal advice.

Experienced Divorce Attorneys in North Central Wisconsin

At Crooks, Low & Connell, S.C., we provide experienced and strategic legal representation for divorcing spouses in North Central Wisconsin. If you are considering a divorce, our attorneys can help you weigh your options and make smart decisions at every step along the way. To learn more in a confidential initial consultation, please call our offices at (715) 842-2291 or send us a message online and we will respond as soon as possible.