July 27, 2018

 

How will the Tax Cuts and Jobs Act of 2017 affect your divorce settlement?

The Tax Cuts and Jobs Act of 2017 that was signed into law by President Trump on December 22, 2017 includes major changes that are sure to affect every American when tax day arrives. For those considering a divorce, one provision in particular could mean thousands of dollars saved or lost each year.

Traditionally,  to bridge the gap between the higher and lower earners in a marriage, the lower earner could be entitled to alimony or spousal support, in the event of a divorce or separation. The alimony is considered income for those receiving it and must be declared as such. For those paying it, it can be itemized as a deduction to receive a tax break. This is taken into consideration when calculating alimony payments and is instrumental in settlement negotiations. The new rules will not change the agreements that have been settled and completed by December 31, 2018.

Starting on January 1st, 2019, the rules will change though. Spousal support will no longer be considered income for those receiving it. There will no longer be tax due on this payment. On the other side, those paying it, will no longer be able to claim this as a deduction on their income tax.

Is there a winner here?

For alimony payers, getting the tax deduction can be very important, because it lessens the financial impact. With these new rules, not only will they lose the deduction, but without it some may be pushed into a higher tax bracket and they’ll still have to pay the spousal support with fewer available dollars. This will surely have an effect when calculating the support payments at settlement.

Some attorneys fear that this will end up lowering the amount of alimony higher earning spouses are willing to offer. It could also induce them to fight harder against alimony and spousal support obligations in the first place.

Your next step:

Many spousal support payers will want to settle the divorce before the end of this year in order to be able to deduct it in future years as well, using existing rules rather than the new rules.

Alimony recipients however,  have the opposite incentive. Many will opt to settle the divorce in 2019  when they will no longer owe federal income tax on support payments. But because spousal support payors will have more reasons to lower payments in settlements after this year, the reciepient spouse may not come out ahead financially by delaying the divorce.

If you are considering divorce, it is crucial that you remember that this change doesn’t go into effect until 2019. If you expect to receive alimony and your support agreement is reached in 2018, you’ll be the one paying taxes on that income. Speak with your divorce attorney to determine if it is best to wait to finalize your support agreement until 2019.

You can also learn more about all the financial implications of divorce at our upcoming divorce support workshop. Learn more and register here: https://www.secondsaturdayscottsdale.com/sss-august-11-workshop/.

This article is provided as a general overview and is not intended to be legal nor tax advice. Please consult your legal and and tax professional for all such advice.

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