Another area recent tax changes impacted is deductions and credits available because of dependents or children. Prior to the 2018 tax year, taxpayers could claim a deduction from income for personal exemptions, usually a spouse, child, or parent. Starting in 2018, however, personal exemptions are no longer a part of the tax return. Instead, the effect of that deduction is to be addressed through withholdings in the taxpayer's payroll.
In the last year that personal exemptions were available, a taxpayer could claim a $4,050 deduction for each exemption. For separating or divorcing couples with children, the ability to claim this deduction was often awarded to one spouse or the other, or even alternated between odd and even years. A spouse who negotiated a separation agreement such that they were entitled to the personal exemptions for the children lost that deduction entirely in 2018. While not as beneficial as a tax credit, however, the loss of that deduction would still cause an increase in taxable income.
Not all the tax changes have had a negative impact, however; in particular, the tax credit for children and dependents have proven to be a positive change to most taxpayers.
Tax credits provide a greater benefit than tax deductions, in that the credits offset taxes owed dollar-for-dollar, whereas tax deductions only serve to reduce the income on which the tax is owed. The last tax reform increased the amount of the tax credit for children (note: to qualify the child must be under the age of 17 for the full tax year, so a child who turns 17 in December does not qualify) from $1,000 per child to $2,000 per child.
Additionally, up to $1,400 of this credit is refundable, meaning the taxpayer could be entitled to a refund even if there was no tax liability.
As with the deduction for personal exemptions, it was fairly common to see parties negotiate who could claim the child tax credit. With the increased amount and the increased refundability, this will continue to be an impact to both an existing separation instrument and those to be executed in the future.
A similar tax credit was created for dependents. For separated or divorced couples, a 17-year-old child in high school or a 23-year-old child in college would both likely satisfy the definition for a dependent. The dependent credit is only $500 per dependent, and it is not refundable. It will serve to reduce any tax liability to zero. Again, for agreements in 2019 and later, the dependent credit may be a negotiating factor when the discussion centers on property taxes.