Divorce is often necessary but there is no doubt that it causes financial hardship. Households that were once supported by two incomes are now supported by one. Even if it was only a one-income household before, that still places the non-working spouse in serious uncertainty.
Taxes are the last problem you need when you are newly divorced or planning on it. Fortunately, the tax reforms arising from the Tax Cuts and Job Act offer new advantages to single taxpayers, including parents. Here are four of them.
No Tax on Spousal Support
A 75-year-old law made spousal support a tax deduction for the one paying it but taxable income for the party receiving it. This was determined at a time when women’s opportunities for advancement were limited. So, this scheme was implemented to assure tax revenue when alimony was the only income received by a former spouse.
Spousal support still primarily benefits women with the Census Bureau estimating that 98 percent of recipients are female. But permanent awards of spousal support where former wives never return to work are rare. Most awards are temporary to allow time to develop marketable skills and secure an acceptable standard of living.
Even with the prospect of improved future income, taxing these benefits can still be a hardship–especially if the spouse returns to school or works only part-time in a tough economy. This hardship will no longer be an issue for any divorce proceeding after December 31, 2018. That makes it much easier to start fresh and not worry about a tax burden on top of other financial challenges.
Lower Income Taxes
Not only is your spousal support nontaxable but any income you bring into your household will likely be taxed less.
Before the new act, an annual income of $38,000 was taxed at 25 percent. That was a tremendous impact, especially if your paycheck also decreased further due to child support or health insurance.
However, when you file your 2018 tax returns, your income tax will reduce to 12 percent. This can definitely ease the financial transition of moving from two incomes to one and help you live better on your own.
At first glance, eliminating the personal exemption appears to be a disadvantage. However, the new law replaced it with a larger standard deduction that benefits single taxpayers.
Before tax reform, the standard and personal exemptions combined for $10,400 if you filed a single person. With tax reform, the personal exemption is replaced with a higher standard deduction. For singles, that increased to $12,000, which is more than the standard and personal exemption combined.
If you are a single parent who applies the head of household deduction, you will notice a considerable improvement too. This deduction increased from $9,950 to $18,000. Conceivably, a single mother with two children can receive this deduction along with $4,000 in child tax credits–$400 of which is instantly refundable.
Even if your overall income tax only decreased by two to four percent, this new deduction still reduces your total tax burden. In fact, this is enough to move you from a 22 percent tax bracket to the coveted 12 percent spot. That makes a large difference in your take-home income.
Child Tax Credits and Breaks
The child tax credits and breaks either stay at previous levels or increase. Child support remains nontaxable.
There is no dispute that raising children as a single parent can be a hardship, so every tax benefit is helpful. Reforms increase the child tax credit to $2,000 per child with total refunds allowed up to $1,400. The Earned Income Tax Credit, child care credits, and student loan interest deductions remain the same.
You receive these benefits as long as your income as a single person does not exceed $200,000. In 2012, the most recent year these statistics were tracked, the average income for a family headed by a single woman was $25,493. Single father families averaged $36,471 per year. This is well within these tax credits as well as the advantages of the tax bracket adjustments described above.
Diane L. Gruber, Attorney at Law, offers 31 years of experience handling divorce, child custody, spousal support, and child support cases in Oregon. Our office serves Clackamas, Multnomah, and Washington counties. Contact us today to schedule a consultation.