Divorce and Taxes
by Laura Chiesman
Here’s a startling fact – more than 800,000 divorces are filed in the US annually.1 While the numbers for 2018 aren’t in yet it’s likely that the pace has increased due to a historic change in the rules around alimony and taxes.
Most of the tax law changes legislated by the 2017 Tax Cuts and Jobs Act took effect immediately but the new alimony rules apply to divorce or separation agreements executed after Dec. 31, 2018.2 Consequently 2018 has been a very busy year for divorce professionals and an even more stressful than usual time for divorcing couples.
Since 1942 alimony has been a tax deductible expense to the paying spouse and treated as taxable income to the recipient.3 Before the new Tax Cuts and Jobs Act (TCJA), payments that met the tax law definition of alimony could be deducted by the payer for federal income tax purposes while recipients of alimony payments had to report the payments as taxable income. This tax treatment stays in place for divorces finalized before December 31, 2018. Importantly, the spousal support or alimony payments mandated in those pre-2019 divorces will be tax deductible for the entire time period they are paid. However for divorces finalized on January 1, 2019 or later, alimony will no longer be tax deductible to the payer or taxable to the recipient.
Whether this change is an improvement, and for which spouse, or is an additional complication and burden of divorce is a matter of perspective and much discussion. Those responsible for paying alimony will have a higher net cost on the same dollars and consequently will likely try to settle on a lower alimony amount. Recipients who won’t be required to claim the payments as taxable income could have more money in their pocket so they may be inclined to agree to a lower alimony amount. These decisions need to be carefully reviewed from each spouse’s perspective and considering their individual tax rates to ensure a fair outcome.
These changes, the effects on the divorce process and the finances of those impacted will continue to be debated going forward. As year-end approaches, time is much better spent by currently divorcing couples on reviewing their in-process settlement agreements and adjusting the details to the tax law changes as appropriate in the context of each particular situation.
Decisions surrounding separation, divorce, child custody and spousal support are complex and emotional at best. Dealing with a New Normal is not easy.
The importance of working with knowledgeable professionals who are up to date on the new laws cannot be overstated. If you need help finding resources and understanding how the current rules may affect you, please reach out to a WealthCoach™ here at our wealth services firm in Satellite Beach, FL for a conversation to explore how we can help!
- Tax Cuts and Jobs Act
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