Separated or Considering Divorce? What You Must Know About the New Federal Tax Law

In December 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. 

If you’re separated or considering divorce, the new federal tax law can have a major impact on your divorce settlement negotiations.

While tax law changes relevant to divorcing spouses include home mortgage and home equity loan interest, attorney fees, IRA contributions, child dependent exemption, child tax credit, and 529 Plans, the most significant change affects alimony payments.

In this regard, it has long been the case that alimony payments are deductible by the spouse paying alimony and taxable as income by the spouse receiving alimony.

Therefore, when determining an appropriate amount of alimony, the gross incomes of each spouse have been considered.

For divorce agreements executed after December 31, 2018, however, alimony payments will no longer be tax-deductible to the payor or taxable to the recipient for federal income tax purposes.

Therefore, when determining the appropriate amount of alimony to be agreed upon or ordered by the Court, each spouse’s after-tax income would need to be considered.

This means that family law attorneys and judges will need to ensure the accuracy of the parties’ respective after-tax incomes – a difficult endeavor without the benefit of tax expertise.

Further, when negotiating settlement of alimony, spouses legally obligated to pay alimony will likely be less inclined to voluntarily agree to larger alimony payments without the benefit of the tax deduction.

By the same token, where an alimony obligation is ordered by a court, it might very well be lowered to reflect the lack of available tax deduction.

It might therefore make sense for the spouse with an alimony obligation to consider “buying out” the obligation where there are sufficient assets to do so.  

An “alimony buyout” is where the spouse who is legally obligated to pay alimony pays the other spouse a lump sum  – calculated by present valuing an appropriate amount and duration of alimony to today’s dollars.  Alternatively, the parties might consider a disproportionate distribution of marital assets to compensate the lower income spouse.

It’s important to keep in mind that the current federal tax law still applies to spouses who are already divorced – or will be divorced by December 31, 2018.

By the same token, the current tax law will still apply for divorce agreements that are modified after December 31, 2018, unless the modification expressly provides that the modified agreement will be governed by the new federal tax law.

As always, it is extremely important to consult with a competent and qualified accountant or tax advisor before making any decisions.

In addition, please contact me to schedule a consultation for substantive legal advice and a personalized strategy for your divorce or separation.

 

 

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