Why the new tax law could make 2018 a popular year for divorce
The alimony tax break is about to be eliminated and that could mean big changes to divorce negotiations.
People who get divorce rarely cite potential tax breaks as a reason for ending their marriages. Yet, as Politico reports, 2018 could end up seeing a surge in divorce filings because of the elimination of a popular tax break on January 1, 2019. That tax break, which allows alimony payers to write off their alimony payments, is being scrapped as part of the tax reform bill, known as the Tax Cuts and Jobs Act, that was recently signed into law by President Trump. Below is a look at how the tax law affects divorce and what current and potential divorcees can expect.
Alimony tax break gets scrapped
While much of the Tax Cuts and Jobs Act has already gone into effect, the part that affects alimony will only apply to divorces that are filed after December 31, 2018. After that date, those who pay alimony will no longer be able to claim a tax break on those payments. Meanwhile, recipients of alimony will no longer be required to pay taxes on the payments they receive.
The changes will not apply to divorce agreements that were finalized and signed before the end of 2018, which means that anybody who is already considering getting a divorce and wants to take advantage of the tax break should talk to an attorney soon.
One issue that could cause problems are prenuptial agreements that were agreed to under the assumption that the alimony tax break would be available for alimony payers. It is unclear how prenuptial agreements that have already been drafted will apply to divorces that occur after the end of 2018.
How the tax break affects divorcees
As for those who are actually going through a divorce, the loss of the alimony tax break is likely to be a loss for both parties. Alimony payers, obviously, will be hurt by the fact that they will soon have to pay significantly more in taxes on their alimony payments.
Recipients will likewise be hurt. As the Pittsburgh Post-Gazette points out, recipients are typically in lower income brackets than alimony payers. As a result, the tax break that payers have so far received is usually bigger than the break that recipients will receive by soon not having to pay taxes on alimony. In effect, while recipients will get a small benefit by no longer paying taxes on alimony, they will likely find that their alimony payments overall will end up being smaller because payers have less room to be generous with their support payments.
Family law advice
Divorce brings up many legal and financial issues that can have serious long-term effects years after the divorce is finalized. Getting the divorce agreement right the first time is extremely important since there are rarely any do-overs. A family law attorney can help anybody who is considering going through a divorce make sense of their options and help guide them through the process so as to better protect their best interests.