Prior to the tax act, taxpayers who required additional cash for a variety of reasons, including buying our their spouse’s interest in the residence, would regularly refinance the mortgages on their residence for a larger amount. The benefit was that the mortgage interest on the refinanced mortgage could be deducted up to a $1,000,000 cap.
The passage of the Tax Cuts and Jobs Act has effected a huge change limiting the mortgage deduction in this scenario, which may have a significant impact on parties going through a divorce. The new law limits the amount of the mortgage to funds needed to acquire a residence, construct a residence or substantially improve a residence. So, if you are refinancing for one of these allowable expenses, and stay below the $1,000,000 cap, the interest would still be deductible. However, in a divorce that is often not the case.
In a divorce, the party retaining the residence will have to refinance the loans related to the residence to remove the other party’s name. Often, this will be both a mortgage and a home equity line of credit. Moreover, the party retaining the residence often has to refinance for a larger amount to make a cash payment to the other party to “buy out their interest” in the house. With the new law, the parties refinancing the marital residence to take cash out to pay off the other spouse will be limited to the principal balance prior to the cash out refinance in terms of the interest that can be deducted. For example, if the principal mortgage balance is $300,000 and the party retaining the residence is refinancing for $500,000 to pay off the other spouse, they will be limited for purposes of the deduction to the interest on the $300,000. Interest on the additional $200,000 cannot be deducted. In addition, there will be no deduction when the mortgage is refinanced to now include the home equity line of credit. Parties are going to have to give more consideration to the tax consequences and resulting true cost of retaining the residence.
In my prior installment of this series (Family Law Tip #2), I discussed the substantial reduction in the allowable amount of mortgage interest which is now tax deductible on any mortgage taken out after December 15, 2017. The 2017 Tax Cuts and Jobs Act reduced the deductible amount by $250,000 on homes purchased after the cut off date - capping the allowable interest deduction to mortgage principal of $750,000 (reduced from $1,000,000 prior to December 15, 2017). Beyond the lower mortgage cap, another big change is that, in general, the interest on home equity lines of credit is no longer deductible (with some very limited exceptions). This is true regardless of whether the home equity line of credit was taken out before or after the change in tax law.
These changes to the allowable mortgage interest deduction will have a bearing on the decision of divorcing parties as to whether to keep their second residence post-divorce. In the past, people often kept the second residence, in part knowing that they were able to deduct the mortgage and home equity line of credit interest on their tax returns and the maximum amount of $1,000,000 in indebtedness allowed for flexibility. In the advent of the Tax Cuts and Jobs Act, some will have to rethink this decision. If the expenses related to their vacation homes cannot be deducted, the cost to maintain the home will be higher.
While there was some back and forth in the various drafts of the tax code revisions, ultimately the deductions for the mortgage interest apply to both the primary residence and a second home as well. However, as stated above, the $750,000 cap makes it more likely that parties will not be able to deduct all of the interest on the mortgages for the primary residence and secondary residence when those amounts are combined. Consulting your attorney and accountant will help you to determine the actual increase in the cost of maintaining your vacation home so that you can make an informed decision.
The Tax Cuts and Jobs Act includes a substantial change to the allowable amount of mortgage interest which is tax deductible. For those who are contemplating purchasing expensive homes and taking out a mortgage with a principal balance of more than $750,000, the interest on the amount over $750,000 will not be tax deductible. For mortgages issued prior to December 15, 2017, the mortgage interest is deductible for principal mortgage amounts of up to $1,000,000. However, after December 15, 2017, that amount is reduced to principal amounts of up to $750,000. This only applies to properties purchased after December 15, 2017. Absent any extension of this law, the amount reverts to $1,000,000 in 2026.
Another big change relates to home equity lines of credit on your residence. In the past, the mortgage and home equity line of credit could be lumped together, and the interest on both deducted up to the maximum allowed loan amount. That is no longer the case. It does not matter if the home equity line of credit was taken out before or after the change in tax law. In general, the interest on home equity lines of credit is no longer deductible. There are some limited exceptions to this where the funds are used to substantially improve the residence, but even this exception requires very specific requirements to be met. This tax change could have a large impact on those who intentionally took out a home equity line of credit rather than refinance their mortgage to a larger amount. Without this deduction, taxable income will be higher.
As everyone has heard by now, the 2017 Tax Cuts and Jobs Act was signed on December 22, 2017, and is now law. While the name may be confusing, what it means for taxpayers is that many tax laws are changing. Attorneys and accountants are still figuring out what the impact of the Act will be, and more direction will be provided by the IRS in the coming months and years. This is the first in a series of blogs designed to demystify the new tax laws that may impact those who are divorced or currently in the process of getting divorced.
Alimony has long been tax deductible to the payor (person paying alimony) and added to taxable income to the recipient (the person receiving alimony), as long as specific requirements set forth by the IRS are followed. The result has been an income shift from the party that pays a higher tax rate to the party that pays a lower tax rate. In the end, both parties under this scenario end up with more money than if alimony were not taxable or deductible. This treatment has applied to spousal support, alimony pendente lite and alimony.
With the passage of the Tax Cuts and Jobs Act, such treatment of alimony will change, but not right away. As of now, the change is only for tax years 2019 through 2025, and specifically will only apply to agreements signed after December 31, 2018. It remains to be seen what will happen after 2025, or possibly before if there are additional changes to the tax code. There is an exception made, however, for those who have already entered into an agreement on or before December 31, 2018. The law changes for all agreements entered after December 31, 2018, so that the alimony will no longer be deductible for the payor, or count as income to the recipient. It remains to be seen if there are any changes to how the amount of spousal support, alimony pendente lite or alimony are calculated given the change in the tax law. If there are no changes to the calculations, the result will be a loss of tax advantage for the party paying support, while the party receiving support will receive the benefit. If there are changes to the support calculations, I would anticipate that we will know by the end of this year. Stay tuned.
Although the weather is just starting to change to cooler temperatures, the holiday season is fast approaching. Holiday displays are up, holiday music is already playing and even the pre-Black Friday sales have started. It seems that with the warmer temperatures well into the fall, the holidays have snuck up on us all. While it is easy to get wrapped up in the spirit of the season, if you have minor children and a custody agreement or order, it is time to take a look at your custody documents and give some thought to what lies ahead in the next several weeks.
Before you make plans with your children, it is important to see what the holiday schedule is for this year. Which days of the holidays are your children with you, what times are they with you, and who is responsible for transporting the children? It is important that you know the answers to all of these questions. Take out your custody agreement or order now and look through the schedule for Thanksgiving through New Year’s. If you have questions, now is the time to ask your attorney, not on Thanksgiving morning. We all know that a lot of advance planning occurs for the holidays, and family gatherings are scheduled. If it is important to you that your children celebrate with you and your extended family, you want to be sure to make your plans around when you have physical custody of the children. Knowing the details of the holiday schedule now will enable you to make plans based upon the custody schedule and keep everyone happy, which should result in a more peaceful holiday for you.
Prior to Pennsylvania legally recognizing same-sex marriages, other states did offer same-sex marriages or civil unions. A problem for couples who entered into an out-of-state marriage or civil union was that if they later decided to divorce, they could not do so in the Pennsylvania family courts. This was because Pennsylvania did not recognize those marriages or civil unions as legal. In June 2013, in United States v. Windsor, the United States Supreme Court ruled that the Defense of Marriage Act’s (DOMA) defining marriage as between one man and one woman was unconstitutional, but the Court limited the impact of their decision. In May 2014, the United States District Court for the Middle District of Pennsylvania ruled in Whitewood v. Wolf that Pennsylvania’s definition of marriage and refusal to recognize out-of-state same-sex marriages were unconstitutional. Then, in June 2015, the United Stated Supreme Court in Obergefell v. Hodges ruled that same-sex couples must have the right to marry. This decision applies to every state.
While these decisions expanded rights to same-sex couples, a lot of questions were left unanswered. One of the big questions was whether civil unions entered into in other states prior to the legalization of same-sex marriage would be recognized by Pennsylvania. If the civil unions were not recognized as legal marriages, then Pennsylvania courts did not have to grant divorces, divide the assets and liabilities through equitable distribution or address support issues There were potential child custody ramifications as well. This left Pennsylvania same-sex couples who legally entered into out-of-state civil unions without the ability to divorce or deal with the economics related to their marriage through the family courts in their home state.
On December 28, 2016, the Superior Court of Pennsylvania addressed this question in Neyman v. Buckley. The Superior Court of Pennsylvania ruled “that a Vermont civil union creates the functional equivalent of marriage for the purposes of dissolution.” In this case, the parties, Pennsylvania residents, entered into a Vermont civil union in 2002 and separated later that year. From 2014 through 2015 the parties unsuccessfully sought a divorce in Pennsylvania and appealed their case to the Pennsylvania Superior Court arguing that the Pennsylvania family court should have jurisdiction to dissolve their Vermont civil union and that the Vermont civil union should be treated as a legal marriage in Pennsylvania. It is important to note that Vermont intended same-sex couples that entered into civil unions to have the same rights and access to the family court system as those who were married. The Superior Court of Pennsylvania used this reasoning to “conclude that the legal properties of a Vermont civil union weigh in favor of recognizing such unions as the legal equivalent of marriage for purposes of dissolution under the Divorce Code.” This decision allows same-sex couples who entered into out-of-state civil unions the same rights as if the civil union were a marriage. It also allows these couples access to Pennsylvania family courts to address those issues permitted under the Pennsylvania Divorce Code.
"The secret to change is to focus all of your energy, not on fighting the old, but on building the new.
- Dan Millman, “Way of the Peaceful Warrior: A Book That Changes Lives”
People make resolutions to start off the New Year, such as dieting, giving up smoking, saving money and making more money. As we begin 2017, a common resolution on the minds of many is to get a divorce.
Oftentimes, this “resolution” was made earlier in the year, but there was a decision, or even a discussion, to not do anything until after the holidays.
Making the decision to end your marriage is the first step. Then, there is the actual process. The next step is to get yourself organized. If you have access to records regarding your assets, liabilities and income, get them. You should photocopy them and keep them somewhere safe. (The safest place is in the home of a friend or somewhere your spouse does not have access.) If you do not have access to that information, do not panic. You will be able to obtain the information during the divorce process.
After you are organized, get legal advice from an attorney in the area in which you live. Do not rely on the advice of friends and family. In particular, do not rely on information about divorces on the internet. There is a lot of misinformation on the internet. Divorces and their outcomes tend to vary from person to person based upon their circumstances. Get advice tailored to your circumstances.
Lastly, be reminded that you are not the only one in your divorce. It involves your spouse, your children, your in-laws, your friends and neighbors. You will find yourself in unfamiliar territory. However, if you remember that you are making this resolution for a reason, you will manage your divorce with dignity, and soon find yourself on the other side.
Most people believe that they have plenty of time before they have to start considering their 2016 taxes to be filed in 2017, and for most, the tax return process is not something they just can’t wait to get started. That being said, if you are separated or in the process of a divorce, now is the time to start thinking about your tax filing status for your 2016 income tax returns. Some thoughtful planning and discussion now can go a long way in avoiding stressful emergency issues in the weeks leading up to April 15th, and instead provide adequate time to address and resolve any concerns. If you are separated but not divorced by December 31, 2016, you have a few different options of how you can file your taxes: married filing jointly, married filing separately or perhaps even head of household. You cannot file single if you are not divorced in 2016.
The reason to start thinking about your 2016 tax filing status now is that if you want to file as married filing jointly, your spouse must agree. Now is the time to speak to your accountant to determine the most advantageous tax filing status. You should also decide if there are any concerns that you have that would prevent you from choosing one of the options. If you and your accountant determine that married filing jointly is the best option, and your spouse disagrees, you will have time to involve the attorneys and work towards an agreement as to tax filing status. In many cases, an Agreement to File Joint Income Tax Returns/Tax Indemnification Agreement is the best way to proceed in order to set forth each spouses’ responsibilities in terms of preparing and filing the returns, addressing any taxes due or refunds that might be received, and to protect you from any potential tax liability related to your spouse.
You can set yourself up for a less stressful tax season in 2017 by starting the discussion now.
On October 4, 2016, Governor Wolf signed into law new legislation that will change the separation requirement from a two year waiting period to one year. The law goes into effect on December 3, 2016. Under current law, the Divorce Code provides that in cases where only one party desires a divorce, that party must wait two years from the date of separation before they can move the matter forward. At that two year mark, the party who is seeking the divorce can move the matter forward without the non-consenting party’s agreement. The longer waiting period has often led to cases dragging on for too much time, which can lead to more animosity between the parties. For children involved in the separation, this has often had a negative impact. As a result of the passage of this new law, the hope is that cases will resolve much more quickly.
It should be noted, however, that at the one year mark from the date of separation, the case is not resolved, but rather at that time the case is permitted to proceed. It is by no means a guarantee that the process will not be lengthy from that point forward.
Stay tuned for updates as we see how the law is applied by the courts.
The decision to remarry is not made lightly. Marrying a second time is oftentimes very different from a first marriage. Parties involved in a second marriage are likely to have assets and children from a prior relationship. Recalling the time, money and emotional energy spent during a divorce, friends and advisors might mention a prenuptial agreement. A well-drafted prenuptial agreement can protect these hard-earned valuables.
Is a prenuptial agreement right for you? It is if you want to avoid the aggravation and expense of litigating your future. Protect yourself.
A prenuptial agreement is a contract between persons who plan to marry. The agreement addresses how property is to be divided or the terms of support/alimony in the event of a divorce or the death of one of the parties. Executing an agreement before being married in order to address what will occur in the event of divorce is not romantic, but it is smart.
What can be expected? What needs to be done?
Once it is decided that a prenuptial agreement is appropriate, the first step is to contact an attorney well in advance of a wedding date. Presenting a prenuptial agreement to one’s fiancée on the eve of a wedding adds unnecessary pressure to an already stressful time.
Anticipate providing your attorney documentation of current assets, liabilities and sources of income. To ensure that an agreement's validity cannot be challenged at later date, the parties must disclose their current financial status. Prepare an outline of assets and liabilities and bring recent tax returns to your meeting to help make the process easier.