Overcoming Challenges for the Modern Family
This year brought more obstacles than ever for families — from health concerns, finances and unemployment, to education and childcare. At increasing rates, unmarried couples are choosing to forego marriage, while married couples are deciding to divorce. These matters are all the more complicated for “modern families.” Previously the minority–but increasingly the norm–LGBTQ+ couples, unmarried partners and blended families face unique challenges that may require additional planning.
I. Potential Tax Rebates for Families with Older Children
The Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, passed by the House on May 15, 2020, includes a second tax rebate for certain eligible individuals. The bill mirrors the tax credits contained in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, with one important change that benefits parents of older children. While the CARES Act provides a tax credit for each child under the age of 17, the HEROES Act provides parents the additional $500 tax credit regardless of the age of their dependent. This could provide much needed relief for families (and multi-generational families) with dependents especially considering that there is no longer an exemption for dependents.
II. Adoption Credits
A special adoption tax credit is available to unmarried, blended families that is not available to married couples. If you completed an adoption in 2020, you can deduct up to $14,300 of qualified expenses related to the adoption. For the adoption of a child with special needs, the full deduction may be taken, even if the adoption costs are less. This could help save tax dollars for blended families if one partner adopts the other partner’s child. For couples planning to marry, consider adopting each other’s children before the wedding in order to benefit from this special tax credit.
III. Modernizing the Tax Code
The Internal Revenue Code, like many laws passed prior to the legalization of same-sex marriage, needs a “modern” update. The Promoting Respect for Individuals’ Dignity and Equality Act, or “PRIDE Act” (House Resolution 3299), attempts to do just that. If signed into law, the PRIDE Act may allow same-sex married couples to amend their income tax returns to file as married for all prior years in which they were legally married. As of now, individual taxpayers who wish to amend their returns to file jointly with their spouses are limited to a three-year look-back statute of limitations. Passage of the Act could potentially bring more than $60 million in tax refunds to same-sex couples. In addition, the PRIDE Act attempts to update the Code for modern families by making it gender neutral and by removing references to male, female, husband, and wife.
IV. Removal of the Alimony Deduction
With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) came the elimination of the alimony deduction. For divorce agreements effective as of January 1, 2019 or later, the spouse paying alimony can no longer deduct the cost, while the spouse receiving the alimony no longer is required to claim it as income. The deduction was removed because many more were claiming the deduction than reporting the payment on their income tax returns. As a result of the elimination, negotiating divorce settlements has become more arduous.
The best strategy for modern families is to have a written plan in place. Here are some recommendations:
I. Why can’t we just get along?
The more entangled the lives of a couple are (such as purchasing real property together or having children), the bigger the risk if they decide to split. Unmarried couples should consider cohabitation agreements. Likewise, couples anticipating marriage should think about prenuptial agreements, while those who are already married may benefit from post-nuptial agreements. Having a mutually agreed-upon plan regarding assets and children while you are amicable can protect all parties’ interests and minimize the potential for future litigation.
II. Where there is marriage, there may be divorce…
Divorce rates across the country have skyrocketed this year, perhaps as fall-out from the added stress of living under pandemic lock-down. When negotiating a divorce or settlement agreement, couples should consider the following:
- Alimony or Support Trusts. These trusts may soften the tax hit for the payor spouse, given the elimination of the alimony deduction, while also guaranteeing payments even after the payor spouse passes away.
- Child Tax Credits. Recent changes to the child tax credit may make it a tool for negotiation. The credit has increased to $2,000 per child, which phases out for taxpayers with $200,000 or more of income. This may provide an avenue to give the credit to the spouse with lower income in exchange for a break elsewhere.
- PRIDE Act. Divorcing couples should leave the door open for the PRIDE Act and include in their agreements the ability to amend returns. They should also determine which CPA will prepare the amended returns, handle any potential audits, and be responsible for the cost of the CPA to avoid future conflict.
- Filing the Final Tax Return. How will the final income tax return be filed as a married couple, once the divorce is finalized (i.e., married filing joint or married filing separate)? What CPA will be used to prepare the return(s)? Who will pay the cost of the tax return preparation? All of these questions should be answered during the settlement process.
III. Why You Need A Plan.
Don’t forget about estate planning and updating documents with every life change. Does your will provide for your life partner? How about the children of your partner who were not adopted? If the parties are divorcing, is there a plan to update documents as soon as the divorce is finalized? It’s important to note that, depending on state laws, divorce may not automatically revoke your ex-spouse as a beneficiary on all assets. A divorce also may not automatically remove an ex-spouse’s family members or friends as trustees or beneficiaries or decision makers. Health care directives also should be reviewed, especially in light of the coronavirus pandemic.
There is a great deal for families to consider with regard to tax planning, and further, there are many proposed laws that may affect opportunities and decisions related to today’s modern and blended families, which should be discussed with tax and estate planning advisors.