Married filing jointly is generally the most tax-advantaged way for a married couple to file a tax return. If a couple divorces, not only is that option off the table, the Tax Cuts and Job Act of 2017 includes some changes that impact divorcing couples and their tax liabilities even further.
For example, before 2018, the child tax credit was $1,000 but, as of January 1, 2018, is now $2,000. The new tax law also increased the amount of income parents can earn before the credit phases out, up to $400,000 from $110,000 (for taxpayers filing jointly) prior to 2018.
The issue is that only the parent who claims the child as a dependent can get the $2,000 credit—it can’t be split between the two parents. The IRS has seven requirements to help determine which parent gets to claim the “qualifying child.” With a $2,000 credit on the line, this may require more negotiation in the divorce settlement.
Similarly, prior to the new tax law, the spouse paying alimony support took the tax deduction, and the recipient paid tax on the alimony income. This arrangement often resulted in alimony payments being “tax affected” and grossed up to cover the tax burden on the recipient. In other words, the payer would pay more than the agreed amount of alimony so that, after taxes were paid, the recipient would actually net the amount of money agreed upon in the divorce negotiation.
Beginning with agreements or orders after December 31, 2018, alimony is no longer tax deductible to the person who pays it, so the need to tax affect the payment goes away. Note that there are still some questions about what happens in the case of a separation agreement adopted in 2018 but incorporated into a final divorce settlement in 2019.