High-net-worth divorces are complex, as they often involve share accounts, investments, prime real estate, and other complex assets. The Tax Cuts and Jobs Act of 2017 has introduced changes that will significantly impact the wealthily divorced, and it will become a reality after December 31, 2018.
On the one hand, spousal support will no longer be taxable for the payor spouse, nor will it be deductible for the recipient spouse. This is good news for high-net-worth divorcees. With the impending support payments no longer regarded as income, some spouses who are entirely supported by alimony, for example, are going to qualify for tax credits hitherto not available to them.
Additionally, child credit has doubled to $2,000, and the threshold has gone up to $200,000 for single filers. Moreover, thanks to a shift in parameters, many high-profile divorcing partners will no longer be faced with their taxable income being subject to the Alternative Minimum Tax (AMT). Instead of 5 million taxpayers affected in 2017, roughly 200,000 individuals will be affected in 2019.
Regarding child support, if the combined gross income is greater than $25,000 per month, the case becomes a “non-guideline” child support case, which frees us, high-net-worth matrimonial attorneys to negotiate support amounts as we see fit.
The “qualified tuition plans”, aka 529 plans, have also been altered under the TCJA. Up until now, the 529 plans meant that the money saved for children’s higher education purposes could grow exempt of capital gains taxes. From January 2019, up to $10,000 per child per year could also be used to pay for private school or homeschooling, allowing for a greater scope of savings unaffected by the tax.
Nonetheless, in spite of these positive changes, the new tax laws make the family home more expensive. Forbes reported that “the deductibility of property taxes and the amount of mortgage that qualifies for interest deduction” has been reduced. Instead of the $1,000,000 cap, the mortgage interest deduction will only be available for interest paid on up to $750,000 of debt on first and second homes combined.
Effectively, one no longer has an additional break for spending more, and high-net-worth buyers are now affected by the same tax benefit as many other taxpayers. Accordingly, if the mortgage is high, and one spouse wishes to keep the house and pay the existing mortgage (predating the TCJA), they should be able to take advantage of the benefits of the $1 million limit. However, if one or both spouses buy property during or after their divorce, they will have to do so at the reduced limit.
Each family considering divorce now will be affected differently by the new tax laws and time is of the essence when reviewing and evaluating financial scenarios. Some states, including ours, New York, will impose automatic financial restraining orders on the parties upon filing a divorce. These may immediately freeze assets and prevent people from modifying bank accounts, and insurance policy beneficiaries, among others. Debt and joint credit lines will also be affected and families should consider whether it is advisable to pay off all joint debt or close access to joint credit lines.
Although divorce is always difficult, being well represented will certainly pave the way to a smoother and more cost-effective process.