New tax rules could have a dramatic effect on divorce
The new tax law could make divorces more contentious thanks to the elimination of the alimony deduction.
When lawmakers in Washington recently passed the Tax Cuts and Jobs Act they probably didn’t think that one side effect of the tax reform legislation would be an increase in divorce. Yet that is what may happen because, as PBS Newshour reports, the new tax law gets rid of a 75-year-old alimony tax deduction at the end of 2018, which could lead to a rush of divorces as couples try to take advantage of the soon-to-disappear tax break. The elimination of the tax deduction could affect various aspects of the divorce process, from how alimony amounts are calculated to how likely a divorce is to end up in court.
Turning the tables on alimony
Under current law, alimony payments are tax deductible for the payor. The recipient, meanwhile, is obliged to pay taxes on any alimony he or she receives. Under the new tax law, however, that situation will be reversed, with the payor no longer eligible for a tax deduction and the recipient no longer required to pay taxes on payments. The changes only apply to divorces that are begun after December 31, 2018.
While that change may sound fair since the elimination of the tax deduction is seemingly being balanced by the elimination of the need to pay taxes on alimony, in effect it will mean more money ends up going to the federal government and less will be available for alimony. That’s because those paying alimony are usually in a higher tax bracket than those who receive it. Therefore, the alimony deduction is usually larger than what recipients pay in taxes.
How the changes affect divorce
In effect, the tax deduction gave alimony payors more incentive to offer larger alimony amounts or to at least be more flexible in how those amounts were negotiated. The concern now is that with the deduction eliminated, payors will be less willing to negotiate over alimony payments. That lack of flexibility is likely to make divorce negotiations more contentious and will likely lead to more divorces heading to court .
Furthermore, as the Pittsburgh Post-Gazette notes, temporary spousal support guidelines in Pennsylvania are based on the assumption that the payor will be eligible for a tax deduction. With that deduction soon to disappear, those guidelines will need to be rewritten.
Also, many prenuptial agreements that were written with the assumption in mind that alimony would be tax deductible could also run into problems and may either have to be rewritten or else could be more easily challenged.
For those who are considering a divorce, it is important to talk to a family law attorney as soon as possible. Divorce is about more than the end of a romantic relationship, it also has important legal and financial implications as well. A divorce attorney can help clients understand what their rights are and help them protect their best interests when negotiating a settlement.