How would you describe the overall impact of the tax reform on divorce?
Ilene B. Goldstein: While not unique to divorce, it makes it more difficult to creatively reduce a party’s taxable income while achieving a net result that’s better for both parties. The changes brought about by the tax reform act impact settlement negotiations, thus making divorce cases more complicated. Lawyers frequently use divorce software when trying to analyze the tax impact of various settlement scenarios; however, it’s important to remember that some of the software used to calculate these tax implications—especially as it relates to alimony and child support—have not been updated to conform with the changes brought about by the tax reform act, so people should proceed with caution.
What’s the new process for calculating maintenance for those subject to Illinois guideline rules?
IBG: The amount of maintenance is capped so that the recipient’s own net income combined with the maintenance amount received cannot exceed 40 percent of the parties’ combined net incomes. Current statutes are in the process of being implemented by the legislature to conform with the new tax laws.
What effect does it have on dependency exemptions and the child tax credit?
IBG: While it eliminates dependency exemptions, it increases the child tax credit from $1,000 to $2,000 on each qualifying child younger than age 17. A tax credit offsets the taxes owed dollar for dollar. This will impact negotiations on child tax credits, as couples will argue over who’ll be entitled to take each child’s tax credit. The income levels at which the child tax credit is phased is now higher at $400,000 for married jointly and $200,000 for all other filers. Fifty dollars in child tax credit is phased out for every $1,000 of adjusted gross income above the stated limits. There may also be a $500 credit available for dependents who are not under age 17 children, but whom qualify for the child credit.
What aspects of the new tax reform especially affect high-net-worth individuals going through a divorce?
IBG: Many divorcing parties have interests in closely held businesses that need to be valued for purposes of divorce. The lowering of the federal corporate tax rates could result in higher business valuations for closely held businesses. Having a larger percentage of a divorcing couple’s net worth as illiquid can make negotiation of property settlement agreements even more challenging.
How do you and your colleagues work with your divorce clients’ other advisors?
IBG: In light of recent tax law and statutory changes, it’s imperative for us to work collaboratively with clients’ accountants and financial professionals to ensure that everyone’s on the same page regarding short and long-term financial goals. Considerations such as support obligations, which assets are being received by each party, and tax implications of divorce-related decisions should all be discussed. Other topics include calculation of income—taking into consideration business deductions—capital gains taxes, real estate tax deductions, child care credits, value of investments, timing of divorce, future earning capacity, business valuation and retirement.
What will be the impact on divorces finalized before year-end 2018?
IBG: Finalizing by December 31 will allow divorcing spouses to elect whether to have maintenance calculated and paid on each party’s gross or net income. Finalizing a divorce by year-end may be advantageous to both spouses as the deductibility of maintenance may result in more funds being available to both parties.
Read the full Roundtable Discussion from Crain’s Magazine and download the PDF.