Changes to tax law may impact your divorce strategy

If you are considering divorce this year, you may want to be aware of a change to the tax law set to take effect next year. This tax law change will impact divorce finances, and spouses who may be eyeing alimony as a component of their divorce settlement.

Federal income tax laws surrounding alimony or spousal maintenance will change in 2019 due to the “Tax Cuts and Jobs Act,” which both houses of Congress passed on Dec. 20, 2017.  While this change won’t take place until 2019, couples may want to consider those changes with regard to their divorce strategy now. It may mean working toward being divorced in 2018, before the law changes. Your strategy depends on the specifics of your case and how changes to that law might affect you.

For the last 75 years, alimony was deductible for the payer, while the recipient paid income tax on it. For all divorces after Dec. 31, 2018, alimony will no longer be deductible for the payer, and the recipient of alimony will no longer be required to pay income tax on alimony.

For example, a man who earns $500,000 a year and is in the top tax bracket may decide to pay his ex-wife $100,000 a year in alimony. After a tax break, that will only cost him about $50,000. The ex-wife would receive the $100,000, but is left with $75,000 after taxes. In 2019, the ex-husband may argue that he can only afford $50,000 a year in alimony. So, the ex-wife would then get that $50,000 which is $25,000 less that she would have under the old law.

Divorce attorneys and financial analysts are still scrambling to better understand the changes to this law that’s been in the tax code since 1942. Many attorneys and mediators fear the potential impact of this change and predict more cases could go to court, divorces may become messier,  more people may be forced to stay married due to the expense, and more couples may rush to get their divorces finalized in 2018 so they can still take advantage of the old law.

One expert believes the new law reduces the bargaining power of vulnerable spouses, mostly women, in achieving financial stability after a divorce. The U.S. Census Bureau shows that 98 percent of the 243,000 individuals who receive alimony or spousal maintenance in 2017 were women.

If you are considering divorce and the prospect of alimony, call our office at 253-272-9459 and make an appointment to discuss what we’ve learned about this new tax law.