Family law practitioners seldom cite a fascination with tax law as one of their reasons for selecting this practice area. Nevertheless, competent practitioners need to be familiar with a wide variety of tax nuances. Capital gains taxes affect the “real” financial effect of selling or transferring a home, rental property, or stock portfolio. Corporate or other business tax rates affect the value of a business interest that may be divided or otherwise addressed as part of an asset division. Income taxes (and associated deductions) affect the “real” cash flow that results from the payment or receipt of alimony or child support. Even those practitioners who deal only with child-related issues need to have an understanding of the exemptions, credits, or other tax benefits that do (or used to) go along with responsibility for a child.
For many years, the impact the tax law had on the foregoing issues was relatively unchanging. As a result, experienced practitioners have likely developed various assumptions, rules of thumb, standard language, and favorite computer programs for assessing or addressing issues impacted by tax laws. Most of those long-standing assumptions and rules of thumb are no longer safe or accurate. In this regard, all of us, experienced or inexperienced, are going to have to abandon the old assumptions and learn some new tricks. In addition, an open mind is going to be vital because the few widely reported changes are only the tip of the iceberg.
Tracey L. Coenen’s article, “The New Tax Law for Family Lawyers: Brackets, Rates, Deductions, Credits, and Other Basics,” provides an overview. She helps sort through the effects for families of the changes in deductions, exemptions, rates, and brackets. Among other things, she touches on the “marriage penalty,” “kiddie tax,” and gift tax changes. The author also cautions that many of the tax law changes expire in 2025, leaving further questions about what will happen to deductions and credits after that.
Lane L. Marmon provides more detail on educational savings plans in an article titled “Qualified Tuition Programs Under the TCJA.” The author reviews the mechanics of 529 plans, also known as “qualified tuition programs,” which help families plan and pay for their future educational expenses, and she surveys the new tax law’s 529 plan changes. The author explains that the 2017 Tax Cuts and Jobs Act (TCJA) expanded the term “qualified education expense” beyond “post-secondary” education to include elementary or secondary public, private, or religious school education. The TCJA, however, placed a $10,000 annual per-student cap on distributions for elementary and high school expenses. Moreover, payments made for elementary or secondary education may not be tax-free at the state level.
Practically everything you thought you knew about itemized deductions is likely affected by the tax law changes. Michelle F. Gallagher and Joy M. Feinberg provide “The 2017 TCJA: What You Need to Know About Itemized Deduction Changes.” They describe the changes that have resulted in the elimination or limitation of many common deductions. As well, the authors remind us that, while mastering the changes will be vital, these changes are considered temporary and are set to expire in 2025.
Since before the time many of us were born, specifically since 1943, alimony was deductible by the payor and included in the gross income of the payee. That all changed on January 1, 2019, when, under the new TCJA, alimony payments made in accordance with a divorce decree or separation agreement were no longer to be deductible. Bernadette A. Barbee discusses that game-changing development in “Alimony After the TCJA: Dystopian Nightmare or Necessary Change? Either Way, It’s Here to Stay.” As she notes, this change, unlike other TCJA changes, is not set to expire in 2026. The author suggests possible creative solutions to account for the difference between paying (or receiving) after-tax dollars. However, as the author notes, some of the work-around solutions carry their own limitations. Moreover, the repeal of the alimony deduction may also impact property negotiations to the extent that property divisions will no longer be subsidized by tax savings associated with alimony. Without the alimony deduction, the property division itself will be a more contentious battleground.
The impact of the tax changes was not limited to the 1040 personal tax return. There were also major shifts affecting large and small businesses and professional practices. Donna M. Pironti touches on those changes in “Lions and Tigers, and Pass-Through Deductions, Oh My!” Professional practices or other small businesses frequently need to be valued and/or allocated in divorce cases. This article takes readers through the TCJA’s “totally new and not easily understandable” qualified business income (QBI) deduction for passthroughs. The author declares that it is important for all family law attorneys to understand the new QBI deduction basics so that they know that there will be changes in the financial information needed to support business valuations, discovery requests, and marital/nonmarital tax liabilities. But, she warns, the newly required calculations will take additional time, and some calculations will not be determinable until after year-end.
While family law practitioners may not provide tax advice to businesses, we certainly spend time looking at business expenses and business payments to determine the true income of the participant and to assess the value of that business interest as an asset in divorce. James M. Godbout and Catherine M. Kane have written “New Tax Law Basics for Businesses and Families.” This article examines the TCJA’s changes to tax law that impact individuals, C corporations, and pass-through entities in areas relevant to lawyers in a family law practice, including carried interest, meals and entertainment, certain fringe benefits, and excess employee compensation, among other things. Regarding meals and entertainment, from a divorce standpoint, many cases involving small businesses necessitate the hiring of a forensic accountant to see if personal expenses are being run through the business. Going forward, these small business owners might become even more creative in allocating personal expenses in various other expense categories. There have also been changes that affect deductions by employers for certain transportation fringe benefits, as well as changes relating to the deductibility of performance-based compensation.
In our practices and, for many of us, in our personal lives, deductions for things like mileage, phone, Internet, office expenses, and the like are significant. The landscape has changed, and the article by Christine Gonzalez, “Business Expenses, Meals, and Entertainment Under the TCJA,” should be required reading. The TCJA calls for the suspension of unreimbursed business expense deductions for taxable years 2018 through 2025. However, the change applies only to expenses incurred by employees where the expenses are claimed as miscellaneous itemized deductions on Schedule A of Form 1040. Some such expenses may still be deductible by some taxpayers as unreimbursed business expenses on Schedule E of Form 1040. Additional consideration should be given to business meals and entertainment expenses beginning in 2018, as the new law drastically changed the rules governing these expenditures.
Marissa Pepe Turrell and Mark Harrison have written “The Impact of the 2017 Tax Cuts and Jobs Act on Business Valuation.” The Act’s tax changes impact the valuation of businesses in various ways, depending on the structure of the business, although the exact nature of the impact is still uncertain. The authors propose that, despite the uncertainty of some of the particulars, the TCJA can affect value in three key ways: 1) taxes must be calculated according to the new TCJA rules; 2) management decision-making may stray from prior norms and must be factored into cash flows regardless of valuation technique; and 3) many of the new rules sunset, and practitioners should not assume that they will remain in effect in perpetuity. The authors discuss reasons why a particular business’s value may rise or fall in the wake of the new tax law, valuation fundamentals, capital expenditure and depreciation changes, pass-through entities under the new law, interest deduction limitations, and net operating loss changes.
Medical expense associated with creating a family using assisted reproductive technology (ART) can be monumental. Bill Singer and John T. Passante have provided an article called “ARTful Deductions: On Allowing Intended Parents and the Socially Infertile to Deduct Medical Expenses.” When determining whether a taxpayer can deduct a medical expense for ART, the courts have made a distinction between medical infertility and social infertility. Medical infertility means that people will be deemed infertile if their reproductive organs are incapable of producing viable gametes or if they have an inability to gestate a fetus to full term. Social infertility means that people’s social circumstances prevent them from reproducing. Same-sex couples, single individuals of either sex who desire to become parents, and couples where one or both are transgender fall within this category. This IRS distinction between allowed and unallowed deductions based on the foregoing classifications may be ripe for reevaluation. The authors argue that in making a distinction between medical and social infertility, court decisions have failed to recognize that, for same-sex couples and couples in which one or both individuals are transgender, their social infertility stems from their sexual orientation or gender identity, which are immutable characteristics rather than choices.