This article analyzes why the new tax law’s elimination of the alimony deduction could make divorce uglier.
It may come as a surprise to many, but one of the biggest changes to divorce this year could be thanks to the recent tax law passed by Congress and signed by President Trump in Washington. Hidden in the law, which is called the Tax Cuts and Jobs Act, is a provision that eliminates a tax deduction that, for the past seven decades, has played a big role in how divorces are negotiated. That tax deduction allowed alimony payors to deduct their alimony payments on their tax returns, but with the deduction soon to be eliminated, legal and financial analysts expect divorce negotiations are likely to get a lot uglier.
What is changing?
For the past 75 years, people paying alimony have been allowed to deduct their alimony payments on their tax returns while those receiving alimony had to declare those payments as income. As CNBC reports, the rationale behind this arrangement was that the person actually receiving the alimony money should be the one paying taxes on it.
However, for all divorces after December 31, 2018, alimony payors will no longer be able to deduct their alimony payments. Conversely, those receiving alimony will no longer have to pay taxes on it.
Payor and payee will get squeezed
At first glance, it may sound as though the tax law is a boon to those receiving alimony, since those people will no longer have to pay taxes on alimony. However, analysts say that the elimination of the alimony deduction will hurt both payors and payees.
Because alimony guidelines are written with the tax deduction in mind, current alimony amounts tend to be more generous towards payees since the payor knows that he or she will be able to deduct the payments come tax time. Furthermore, people paying alimony are usually in a higher income bracket than those receiving alimony. As a result, the deduction tends to be worth more than what the payee pays in taxes on alimony. In effect, that means that the payor can be more flexible and generous in negotiations surrounding alimony. With that deduction soon to be eliminated, more of the money that would have before gone towards alimony payments will instead end up going to taxes. In fact, as Politico reports, the elimination of the tax deduction could even lead to a surge in divorce filings this year in order to meet the December 31, 2018 deadline when the deduction will no longer be available.
Family law assistance
Family law can impact various areas of one’s life, including, as the above shows, taxes and finances. That is why anybody considering a divorce should contact our Newton family law attorneys for help. The stakes in a divorce are just too high to leave anything to chance. An attorney can advise clients about what legal options they have and how to pursue negotiations in such a way that protects their best interests.