5 days ago
Divorce Tax Planning After the One Big Beautiful Bill Act
Taxes touch every family in all formats - single, married, separated, and divorced. The tax implications introduced by the One Big Beautiful Bill Tax Act (OBBBA or the Act), signed into law on July 4th, 2025, have far-reaching implications, especially for families navigating the complexities of divorce.
We will review three provisions from the Act that could impact separated and divorced families with dependent children. Further below, we'll break down two changes made to itemized deductions - these may have an impact on your return regardless of dependent status.
Before diving into the details, it's important to understand two foundational concepts that influence how the changes may apply to you:
For personalized advice, please consult your wealth planning team and a qualified tax professional.
Now, let's discuss three specific provisions that may impact you and your family.
Enhancements to the Child Tax Credit
While no dollar amount can quantify the value of care you provide, the Child Tax Credit (CTC) is designed to help offset some of the costs associated with raising children under the age 17 at the end of the tax year.
The Act increases the CTC from $2,000 to $2,200, indexed for inflation, starting in 2025. While $200 may not appear to be a dramatic increase, keep in mind that tax credits generally offer more tax reduction than deductions.
The CTC credit is subject to income limitations. Single and Head of Households filers are phased out by $50 for each $1,000 that a taxpayer's MAGI is over $200,000. Similarly, for joint filers, the credit begins to phase out at the same rate with MAGI over $400,000. For more information on the phase out and potentially refundable portion of the CTC, review the IRS's webpage.
If separated or divorced, typically the custodial parent claims the CTC, but the custodial parents may sign a release to allow the non-custodial parent to claim the credit. Generally, the custodial parent is the parent with whom the child lives with for the majority of nights during the tax year. If the child spends an equal number of nights with each parent, the parent with the higher AGI typically claims the CTC. For more information, consider reviewing the following IRS resources below. Additionally, contemplate the potential implications of the CTC in child support settlement agreements.
Increased Contribution Limit for Dependent Care Flexible Savings Accounts
Starting in 2026, the maximum Dependent Care Flexible Savings Account (DCFSA) contribution increases from $5,000 to $7,500 a year. DCFSAs allow for pre-tax savings to pay for eligible dependent care services, and could potentially reduce your tax burden. The increased contribution limit could be especially helpful for single or divorced parents managing childcare costs independently.
For example, imagine a single parent in the 22% marginal tax bracket. By maximizing contribution to the DCFSA, they could reduce their taxable income by $7,500 and potentially save up to $1,650 in taxes ($7,500*22%).
A New Tool for Tax Advantaged Savings: 'Trump Accounts'
To promote savings and financial stability for young Americans, in 2026, individuals will have access to a new savings tool for minors called 'Trump Accounts.' These accounts are expected to be rolled out as soon as January 2026, with participating financial institutions. For children born in 2025 through 2028, the Federal Government is seeding the account with a $1,000 grant.
Additionally, up to $5,000 of after-tax dollars can be contributed annually to the Trump Account per beneficiary under the age of 18, and practically anyone can contribute to the custodial account. Unlike an individual retirement account (IRA), the minor is not required to have earned income to make or receive contributions. In fact, even employers are eligible to contribute up to $2,500 to their employees' accounts. The funds contributed by an employer are not counted as earned income to the minor, but the employer's contribution does count towards the $5,000 annual contribution limit.
The funds will be invested in an index fund that tracks the S&P 500, and withdrawals are prohibited before the beneficiary is 18. When the funds are withdrawn for eligible expenses, the investment growth is taxed at capital gains rates rather than ordinary income tax rates, which are typically more favorable. Expenses related to education, homeownership, or entrepreneurship, are generally qualified expenses.
The creation of these accounts could provide a timely opportunity to discuss your children's financial futures. Additionally, these accounts could potentially be a strategic tool in divorce settlements, especially when planning for a child's future education or financial security.
In addition to the changes mentioned above, there are two provisions that have the potential to increase your deductions if you itemize or could factor into your decision to itemize vs. taking the standard deduction this tax year.
Increase to State and Local Income Tax (SALT) Deduction
Prior to the passage of the Act, the SALT deduction was limited to $10,000 with no income cap. Effective in 2025, the Act increases the SALT deduction from $10,000 to $40,000 (up to $20,000 for MFS), subject to earning limits. In 2030, barring congressional action, the maximum SALT deduction will be reset to $10,000.
For those who earn less than $500,000 annually, a full $40,000 deduction could be available. If earnings are between $500,001 and $600,000, the deduction is reduced. If income exceeds $600,000, the deduction reverts to the $10,000 cap.
For example, if an individual is in the 24% tax bracket and owes approximately $25,000 in federal taxes, and their state and local income taxes total around $15,000, then the SALT deduction could result in roughly $3,600 in tax savings ($15,000 x 24%), if they itemize their tax deductions. This tax change may affect the division of marital property and tax strategy.
Other provisions that may affect decisions around property are the changes to the mortgage interest deduction.
Mortgage Interest Deduction Made Permanent
Unlike the SALT deduction, the mortgage interest deduction is not affected by income
level or filing status. Instead, it is limited by the size of the mortgage on qualifying homes. The mortgage interest deduction applies to both primary and second homes, provided they meet IRS qualifications.
Until further congressional action, the Act codifies that taxpayers who itemize could deduct interest paid on their mortgage(s) of $750,000 or less ($375,000 if MFS). For example, if a Single filer has a $1,000,000 mortgage that started in in 2018, they could potentially deduct up to 75% of the interest paid for the year ((750,000/1,000,000)*100) = 75%). If the interest rate were 5%, the filer could possibly deduct up to $37,500 (750,000*5%) of interest expenses for the year.
For families going through a divorce, the possible deduction could be an important consideration, especially when dividing residences. A Wealth Advisor and tax professional can help estimate the long-term value of this deduction and guide decisions around refinancing, buyouts, or property transfers.
From enhanced credits, expanded savings opportunities, and revised deductions, understanding how the Act applies to your unique situation is key to making informed, strategic decisions that support you and your family. What provisions from the OBBBA may make the biggest impact on you and your financial future?
