Everyone is buzzing about the new tax overhaul recently passed by Congress. How does it impact you and your family law choices for 2018 and beyond? In a four-part blog series, we will address the consequences of various parts of the tax bill with regard to all aspects of divorce and what you should consider when moving forward with your family law case.

Part 1 of 4: General Filing Status Considerations

If you’re brave enough to dive right into the text of the 1000+ page law, you’re bound to notice dozens of changes for individuals from prior tax law. It’s important to note, though, that most of the changes for individuals and families are set to expire after 2025. It’s unsure what exactly will happen when the clock runs out on these individual tax cuts, particularly considering the issues with the national debt. Congress will have to act again when these terms expire, which could mean another wave of tax law changes that can impact your family.

The first question that comes up with taxes and divorce is the change in your filing status and rate schedule. Most married couples file joint returns for the beneficial tax rate. However, this is not the only option, and your filing status may change as you navigate separation and divorce. Marital status is determined as of the end of the taxable year. This means that your marital status on December 31 decides your options for filing status for the prior year – whether your divorce was finalized that day or the day you said “I do.” However, if a taxpayer is legally separated from his or her spouse “under a decree of divorce or of separate maintenance,” he is not considered married for tax purposes under the federal law. Additionally, if a taxpayer is still married and files a separate return while maintaining a household where (1) the other spouse has not lived for at least the last six months of the taxable year, (2) a child lives principally for at least half of the taxable year, and (3) that taxpayer is responsible for over half the costs of maintaining that home, then that taxpayer is also not considered “married” for federal tax law purposes.

Taxpayers who are “heads of household” are subject to a different tax schedule. Heads of households are defined as individuals who are neither married at the end of the taxable year nor a surviving spouse. In order to qualify for head of household status, the taxpayer must hold a “principle place of abode” with either (1) a qualifying child of the taxpayer or (2) any other dependent if the taxpayer is entitled to a deduction for that dependent. More information on who’s considered a “qualifying child” as well as the new tax credit for certain non-child dependents will be explored in depth in Part 4 – Children and Dependents.

Here’s how the brand new marginal tax rates stack up to the current state of affairs for 2018 inflation-adjusted rate schedules:

UNMARRIED INDIVIDUALS

Current Rate Schedule

Proposed Rate Schedule

10% – Income up to $9,525 10% – Income up to $9,525
15% – Income over $9,525 to $38,700 12% – Income over $9,525 to $38,700
25% – Income over $38,700 to $93,700 22% – Income over $38,700 to $82,500
28% – Income over $93,700 to $195,450 24% – Income over $82,500 to $157,500
33% – Income over $195,450 to $424,950 32% – Income over $157,500 to $200,000
35% – Income over $424,950 to $426,700 35% – Income over $200,000 to $500,000
39.6% – Income over $426,700 37% – Income over $500,000

MARRIED FILING JOINTLY

Current Rate Schedule

Proposed Rate Schedule

10% – Income up to $19,050 10% – Income up to $19,050
15% – Income over $19,050 to $77,400 12% – Income over $19,050 to $77,400
25% – Income over $77,400 to $156,150 22% – Income over $77,400 to $165,000
28% – Income over $156,150 to $237,950 24% – Income over $165,000 to $315,000
33% – Income over $237,950 to $424,950 32% – Income over $315,000 to $400,000
35% – Income over $424,950 to $480,050 35% – Income over $400,000 to $600,000
39.6% – Income over $480,050 37% – Income over $600,000

HEAD OF HOUSEHOLD

Current Rate Schedule

Proposed Rate Schedule

10% – Income up to $13,600 10% – Income up to $13,600
15% – Income over $13,600 to $51,850 12% – Income over $13,600 to $51,800
25% – Income over $51,850 to $133,850 22% – Income over $51,800 to $82,500
28% – Income over $133,850 to $216,700 24% – Income over $82,500 to $157,500
33% – Income over $216,700 to $424,950 32% – Income over $157,500 to $200,000
35% – Income over $424,950 to $453,350 35% – Income over $200,000 to $500,000
39.6% – Income over $453,350 37% – Income over $500,000

As you can see, the marginal tax rates are lower across the board, with higher and broader income brackets. In plain English: under the new tax law, the more money you make each year, the more likely you will have a lower marginal tax rate. More of the taxable income for millions of individuals will be taxed at a more favorable rate, and fewer dollars will be taxed at the marginal rate – this means ultimately lower taxes overall.

It’s important to keep your filing status in mind when making decisions about separation and divorce. Many factors can go into a determination of filing status, and they can all have an impact on what taxes you will ultimately owe – without even considering the multitude of deductions that may apply to you and your family.

Stay tuned for Parts 2 – 4 that will address the new tax implications surrounding alimony, equitable distribution, and children and dependents.

Sources: http://money.cnn.com/2017/12/20/news/economy/republican-tax-reform-everything-you-need-to-know/index.html