In 2017, President Trump signed the Tax Cuts and Jobs Act into law; and in 2019, some of the changes concerning divorce tax are taking effect.
If you’re considering divorce, or even if you’re already divorced, learning about these divorce tax changes and how they could affect you is crucial.
How New Tax Laws Will Complicate Divorce in 2019
Up to this point, alimony has been tax deductible for the payer and taxable income for the receiver. This arrangement has served as a sort of alimony subsidy, incentivizing higher alimony payments.
In 2019, tax deductions for alimony will no longer be permissible, and the tax burden will fall on the person paying it.
Since the alimony payer usually falls in a higher tax bracket, this could mean a significant increase in revenue for the federal government, with some estimates putting it as high as $6.9 billion over the next decade.
In terms of how this will affect the divorcing parties, some disputes exist.
Some argue that the new law will help the party who earns less usually the woman, in heterosexual marriages, since they will no longer be taxed on the alimony they receive. Each alimony payment will certainly go further, without a portion being taken for taxes.
However, the higher-income party will also fight harder to pay less in alimony, as they will no longer be able to deduct alimony payments and will now be taxed on them as well. The lower-income spouse’s lawyer, furthermore, won’t be able to reason that higher payments are necessary because of the tax deduction that their client will have to pay.
Only time will reveal the new law’s real impact, but for now, projections suggest that the person receiving the alimony will lose. According to Laurence Kotlikoff, an economics professor at Boston University, alimony payments will likely become smaller due to the change.
Agreements Modified After 2019
If your divorce was finalized prior to 2019, the new tax laws will not affect your current agreement. However, any new modifications you make moving forward may be impacted.
Certain modifications will indicate that the new laws apply to them. Any modifications that lack this specification will continue to be governed by the former laws.
The takeaway here is to be careful when modifying divorce settlements post-2019, as you may end up wishing you hadn’t changed anything.
Pre- and Post-Nuptial Agreements
The new tax laws may affect pre- and post-nuptial agreements, potentially nullifying certain items. To determine if your agreement will be impacted, review it with an attorney, financial adviser, or both. If necessary, you can renegotiate terms.
Tax Deductions for Dependents
If you have children, the new laws will affect you in one more way: Through 2025, the $4,050 exemption you used to be able to claim for each dependent is being removed. However, the child tax credit, which compensates for the taxes you owe at a ratio of $1-to-$1, will double from $1,000 to $2,000.
What the New Tax Laws Mean for Divorcing Couples and Families
Potentially smaller alimony payments, taxes on alimony paid, and the elimination of the exemption for dependents mean less money for all parties involved. This especially hurts families who are trying to get by financially post-divorce, as the money lost to taxes could have been used for any unexpected needs that arise for the children.
To make the most of the situation, keep these tips in mind when planning your divorce:
- Wait it out. Instead of rushing to be one of the first couples to divorce in 2019, be patient and learn from others. Financial consultants and attorneys will likely find better ways of adapting to the changes as they begin working with them, and you can benefit from their insight.
- Assess your financial situation. You and your spouse, your attorneys, and a financial consultant should be prepared to review your financial circumstances fully. Determine which assets will hurt you and help you, tax-wise, and how you can make resources go the furthest for everyone involved.
- Opt for a lump sum. Giving or taking a lump sum alimony payment may be a strong financial move, and could help you or your former spouse pay for home repairs, invest, or even move on sooner. Speak with a financial adviser about whether a lump sum payment makes sense for you.