Tax Changes and Divorce: Tax Reform May Benefit Both Parties
They say timing is everything. While there may never be an ideal time to file for a divorce, the $1.5 trillion tax reform passed in 2017 may make now a better time than ever. Included within the many tax changes is a provision that eliminates tax deductions for alimony payments.
How Tax Reform Will Affect Divorce Moving Forward
Starting January 1, 2019, spouses paying alimony will not be able to deduct those payments on their yearly tax filing. Under the new laws, the spouse receiving alimony payments will no longer have to pay taxes on that income.
The changes come from the calls of lawmakers to end so-called “divorce subsidies,” or unfair tax benefits that are available to divorced couples, but not married ones.
Why Is This Important?
In the past, tax deductions for alimony payers have lessened the impact payments have made on their finances, making alimony payments more affordable. In many cases, the spouse receiving alimony is taxed at a lower rate, based on income, than their former spouse, reducing the amount paid in taxes.
Often, tax considerations are a factor in alimony settlement negotiations. The deduction and reduced taxation of payments can be used to either party’s advantage to negotiate a payment arrangement.
For example, an alimony paying spouse may agree to a higher payment because of the deduction he or she can claim. The receiving spouse may agree to a lower payment due to the reduced tax liability on the income. In reality, the current taxation of alimony payments helps both spouses save money.
Moving forward, these tax changes may eliminate those considerations, making it more difficult to negotiate an amicable settlement.
When Will This Take Effect?
Any couple who files for separation or divorce after January 1, 2019, will do so under these new tax laws. Couples who complete a divorce or sign a separation agreement prior to this date are grandfathered into current tax laws.
Couples currently considering a divorce may wish to act now to secure the more favorable alimony tax laws.
Need Help Understanding Divorce and Taxes?
Your attorney can help you understand the benefits of filing for divorce under the new tax laws. At Setzer Law Firm, our divorce lawyers know how taxes and divorce can work together. Call Jill and John Setzer to learn more.