As our heads swirl with the many changes evoked by the new Tax Reform Law, we thought it might be beneficial, for clients both past and current, to have an overview of key areas affecting families.
Helping you stay informed, even after mediation has ended, is a central part of CMDR’S long-term mission.
1. Personal Exemptions:
As of 2018, you can no longer claim personal exemptions of $4,150 per individual. Therefore, for a single parent filing with three children as dependency exemptions, the loss will be $16,600 (yourself plus three children).
If you are not filing an itemized return, you might make up the “loss” by using the standard deduction, which has just about doubled. For head of households, the standard deduction is $18,000, an increase from the previous standard deduction of $9,350. For a single filer, the standard deduction is $12,000, an increase from $6,500. However, you will lose the personal exemption deduction(s), which were previously available along with the standard deduction.
2. The SALT Deduction:
This change limits the amount, on an itemized return, that you are allowed to deduct to a maximum of $10,000 for income or sales taxes, and personal and property taxes.
3. Mortgage Interest:
This deduction is limited to interest assessed on the first $750,000 of new loans, whereas previously the limit was on $1,000,000.
4. Equity Line Interest:
The previous deduction for equity line interest, assessed on up to $100,000, has been eliminated.
However, some tax professionals believe that money borrowed for "Acquisition Indebtedness" (funds used to acquire, construct, or substantially improve a qualified residence), will still be deductible. If accurate, this "deduction" would apply to pre-2018 and post-2018 loans for the amount of the loan that pertains to "aquisition indebtedness."
5. Child Tax Credit:
For children under 17, single parents earning up to $200,000 can receive a credit of $2,000 per child. This is a major improvement. Prior law limited parental earnings to $75,000 and provided a credit of only $1,000 per child.
For dependent children over 17, or if you take care of an elderly relative, you can claim a $500 credit subject to same income cap.
6. Child Care Expenses and Dependent Care Account:
If available through employment, parents can put aside as much as $5,000 in a pretax dependent care flexible spending account. In addition, qualified child care expenses still carry a deduction of up to $1,050 for each child under 13 or $2,100 for two children. These two tax benefits cannot be used for the same child care services. However, given that many parents pay in excess of $5,000/year for child care, they can use the dependent care account for the first $5,000 and then use the child care credit for costs in excess of $5,000.
7. 529 Education Plans:
The new law allows parents to draw up to $10,000/year from 529 Plan(s) for pre-college private schooling or, say, tutoring. There is still no limitation on the amount of money to be drawn from 529 Plans for qualified college expenses.
8. Other Education Provisions:
You can still deduct student loan interest of up to $2,500/year. The Lifetime Learning deduction is also still in effect.
9. Capital Gains Exclusion for Primary Homes:
The $250,000 exclusion for single owners and $500,000 exclusion for joint owners still apply subject to the same terms and contingencies.
10. Medical Expense Deduction:
Eligibility for this deduction is now based on 7.5% of adjusted gross income, reduced from the previous threshold of 10%.
11. Tax Preparation Fees:
These fees are no longer deductible.
Of course, the most momentous impact of the 2018 Tax Reform Law will be on alimony payors and recipients divorcing after 2018. For these couples, alimony will no longer be deductible to the paying party or taxable to the recipient party. All those who are divorced or have executed a separation instrument by December 31, 2018 will be grandfathered under the “old” law. There is an exception, however, for couples who file for a modification, beginning in 2019 and agree to follow the “new” law, thereby making their revised support terms nondeductible and nontaxable.
Dr. Lynne C. Halem is the director at the Centre for Mediation & Dispute Resolution in Wellesley, MA. Dr. Halem has worked in the mediation field since 1982. She is on the Family Dispute Service Panel of the American Arbitration Association and a past board member of the Divorce Center, Inc. Dr. Halem served two terms as President of the Massachusetts Council of Family Mediation. She has been featured in Boston Globe and Boston Herald articles on divorce mediation and has appeared on television and radio programs as an expert in the field of mediation and alternative dispute resolution.
Dr. Halem is a recognized specialist in family policy and family law with a masters degree from the University of Pennsylvania and a doctorate from Harvard University. She is the author of two scholarly books on divorce: Divorce Reform: Changing Legal and Social Perspectives (Free Press of Macmillan, 1980), a featured selection of the Lawyers' Literary Club, and Separated and Divorced Women (Greenwood Press, 1982), a Choice book of the year selection for academic excellence. She has served as a consultant to corporations in the public and private sectors and taught at various colleges and universities.