The new Tax Cuts and Jobs Act (TCJA) raises a lot of questions for divorce attorneys. I recently hosted several seminars on the effects of the TCJA on divorcing couples alongside my colleague, Richard Wolf. At these seminars, several questions were raised, which we will individually address in this and future blog posts.
In this article, co-authored with family law attorney Carol Ehlenberger, Esq., we will discuss the new dependency exemption and child tax credit.
Section 11041 of the TCJA suspends dependency exemptions beginning in 2018 and ending in 2025. In tax year 2026, these exemptions will return unless the suspension is further extended. In many divorces, this dependency exemption was used in negotiations as a trade-off for other economic considerations. It is worth noting that agreements signed closer to 2026 should most likely include language to reflect the return of the exemption if the tax laws are not extended.
Current tax law allows for a child tax credit of up to $1,000 per child; however, the phase-out based on adjusted gross income was relatively low. However, under Section 11022 of the TCJA, the child tax credit will increase to $2,000 per child.
In addition, the phase-out thresholds are much higher under the TCJA, with phase-outs beginning at adjusted gross income levels of $200,000 for single filers and $400,000 for joint filers. Under the TCJA, it will take $40,000 (a $50 reduction for each $1,000 over limit) of taxable income over the threshold to phase out the full child tax credit, $80,000 over the limit to phase out the second $2,000 credit and so on, compared to the current law, which sets the limit at $20,000.
As the child tax credit represents a dollar for dollar decrease in tax, and the TCJA includes provisions for a refundable portion of the credit, the credit might be more valuable to divorcing couples going forward than the previous dependency exemption, which reduced taxable income.
The child tax credit applies to a “qualifying child” who must be under 17 years old as of the last day of the taxable year. In addition, the child must have the same principal place of residence as the taxpayer for more than half the year.
For children over 17, there is a reduced child tax credit of $500 available. To qualify, all “qualifying child” rules must be met except that the age requirement will be raised to under 19 years old (or 24 years old if the child is a full-time student).
The question remains as to whether the IRS will allow for a release of this child tax credit to the non-custodial parent, similar to the prior rules for dependency exemption.
We believe that the release, if it conforms to all current rules (which haven’t changed under the new law), should still work, and the non-custodial parent should be able to take the child tax credit. Although the exemptions have been suspended, the definitions of a dependent have not changed.
Even though the IRS might allow for a release of the child tax credit and parties can still negotiate who can claim the same, a court might not have the authority to allocate the child tax credit. Virginia Code Section 20-108.1 states that the court can order one party to “execute appropriate tax forms or waivers to grant to the other party the right to take the income tax dependency exemption for any tax year or future years.”
Under the prior law, the party who claimed the income tax dependency exemption also was entitled to the child tax credit. However, that leaves the question that if there is only the child tax credit (at least until 2026), does the current code language allow the court to allocate it?
Read More Articles on How the TCJA Will Affect Your Divorcing Clients
- IRA Contributions and Alimony Under the Tax Cuts and Jobs Act
- Tax Reform Has Family Law Attorneys Rethinking Financial Strategies for Divorce Clients
About the Authors
Mark Vogel, CPA/ABV/CFF, CVA
Mark is a partner at Gross, Mendelsohn & Associates. He has 32 years of accounting experience, with 20 years of experience working with divorce attorneys throughout the Mid-Atlantic region and leads the firm’s divorce seminar series.
Carol Ehlenberger, Esq.
Carol is a partner at Hirsch & Ehlenberger, P.C. She has over 20 years of experience practicing family law and serves as a member of the Family Law section of the Fairfax Bar Association, among other committees.
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