How the “One Big Beautiful Bill Act” Impacts Divorce Tax Planning

For those who are divorced or going through the divorce process, it can certainly be a trying time mentally, emotionally and financially. From a financial standpoint, the passing into law of the One Big Beautiful Bill Act (“the Act”) on July 4, 2025, may also add complexity to tax planning for families navigating divorce.

In this blog, we’ll highlight aspects of the Act that could impact separated and divorced couples, including those with dependent children. Before we start, let’s consider two foundational concepts that influence how the changes in the Act might apply to your particular circumstances:

1. Adjusted gross income (AGI) and modified adjusted gross income (MAGI). Many deductions and credits are subject to income thresholds that are based on your AGI or MAGI. You can find your AGI on line 11 of the tax return Form 1040. It will include all income sources minus deductions like deductible IRA or HSA contributions. Your MAGI is your AGI with some of these adjustments added back. MAGI is calculated differently for each benefit.
2. Tax filing status. Your eligibility for various benefits will depend on whether you file as single, head of household (HOH), married filing jointly (MFJ), or married filing separately (MFS), as the filing designation will often impact particular income thresholds.

Feel free to contact your Corient Wealth Advisor and qualified tax professional if you’d like to learn more about how the concepts above relate to your specific circumstances.

With these two foundational concepts in mind, let’s turn to some specific provisions in the Act that could impact you and your family.

Child Tax Credit enhancements

The Child Tax Credit (CTC) is designed to help offset some of the costs associated with raising children who are under the age of 17 at the end of a given tax year.

Starting in 2025, the Act increases the CTC from $2,000 to $2,200, and is indexed for inflation. Keep in mind that the CTC credit is subject to income limitations. Single and HOH filers are phased out by $50 for each $1,000 that a taxpayer’s MAGI exceeds $200,000. For MFJ filers, the credit begins to phase out at the same rate once MAGI exceeds $400,000. Visit the IRS webpage for more about how the CTC works.

If you’re separated or divorced, the custodial parent will usually claim the CTC, but custodial parents may sign a release that allows the non-custodial parent to claim the credit. In general, the custodial parent is the one with whom the child resides most 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. The following IRS resources provide info regarding support and credits for divorced or separated parents:

• FAQ for Divorced and Separated Parents
• Support Test for Children of Divorced or Separated Parents (or Parents Who Live Apart)

DCFSA contribution limit rises

Beginning in 2026, the maximum annual Dependent Care Flexible Savings Account (DCFSA) contribution will increase from $5,000 to $7,500. DCFSAs allow for pre-tax savings to help fund eligible dependent care services,¹ and may reduce your overall tax burden. The increased contribution limit could be especially valuable for single or divorced parents who are managing childcare costs independently.

For example, if a single parent in the 22% marginal tax bracket maximizes their DCFSA contribution, they could reduce their taxable income by $7,500, possibly saving up to $1,650 in taxes (i.e., 22% of $7,500).

New tax-advantaged saving opportunity for children

As finances become more challenging, it may be important for your children to learn good habits and begin saving as soon as they can. To help promote savings and financial stability for young Americans, individuals will have access to a new savings tool for minors called “Trump Accounts.” It’s expected that participating financial institutions will begin rolling out such accounts as soon as January 2026. For children born in 2025 through 2028, the Federal government will seed the account with a $1,000 grant.

In addition, up to $5,000 of after-tax dollars may be contributed annually to a Trump Account per beneficiary under the age of 18, and virtually anyone is permitted to contribute to the custodial account. Unlike an individual retirement account (IRA), the minor is not required to have earned income in order to make or receive contributions. In fact, even employers may contribute up to $2,500 to employee accounts. The funds that an employer contributes are not counted as earned income to the minor, but the employer’s contribution does count toward the $5,000 annual contribution limit.

Account assets will be invested in an index fund that tracks the performance of the S&P 500 Index, and the beneficiary may begin withdrawing from their account once they reach age 18. When the funds are withdrawn for eligible expenses, the investment growth is taxed at capital gains rates, which are typically more favorable than ordinary income tax rates. Qualified expenses include those related to education, homeownership and/or entrepreneurship. These accounts could be used as a strategic tool in divorce settlements, especially when planning for a child’s future education or financial security.

SALT deduction increase

Before the Act passed, the State and Local Income Tax (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 a limit in earnings. It’s expected that in 2030, the maximum SALT deduction will be reset to $10,000.

For individuals earning less than $500,000 annually, a full $40,000 deduction could be available. If earnings are between $500,001 and $600,000, the deduction will be reduced, while deductions will revert to the $10,000 cap if income exceeds $600,000.

Consider the following example of how a higher deduction limit can make a notable impact. If an individual in the 24% tax bracket owes approximately $25,000 in federal taxes, and their SALT total is about $15,000, then the SALT deduction could lead to roughly $3,600 in tax savings (i.e., 24% of $15,000), if they itemize their tax deductions. Since this tax change may affect the division of marital property and tax strategy, it’s valuable to consult with a Corient Wealth Advisor and tax professional to help you make the most of any SALT deduction increase.

Mortgage interest deductions now permanent

Changes to the mortgage interest deduction may also impact decisions around property. In contrast to the SALT deduction, an individual’s income level or filing status will not affect the mortgage interest deduction. Instead, this deduction is limited by the size of the mortgage on qualifying homes. The mortgage interest deduction applies to both primary and second homes, as long as they meet IRS qualifications.

Until further congressional action ensues, the Act currently 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 holds a $1,000,000 mortgage that started in 2018, they might be able to deduct up to 75% of interest paid for the year (i.e., $750,000 divided by $1,000,000). If the interest rate were 5%, the filer could possibly deduct up to $37,500 (i.e., 5% of $750,000) of interest expenses for the year. That’s a significant tax break.

For families going through divorce, the possible deduction could be an important consideration, especially when dividing residences. A Corient Wealth Advisor or qualified tax professional can help estimate the long-term value of this deduction and help guide your decisions around refinancing, buyouts or property transfers.

The Act was created to offer enhanced tax credits, more opportunities to save and revised deduction limits. Since the Act could have a meaningful financial impact on many Americans, including families that are navigating divorce, it’s important for you to understand how the Act may apply to your unique situation. The objective is to better position yourself to make informed, strategic decisions that can effectively support you and your family—now and in the future—whatever your family’s status may be.

¹ Eligible Dependent Care FSA (DCFSA) Expenses - FSAFEDS

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