It’s tax season. With the Tax Cuts and Jobs Act, people are talking. President Trump signed the new plan in 2017, but the changes didn’t go into effect immediately. Some have taken place already and will affect returns due in April. Others will wait for next season. There are many positive aspects of this Act that will benefit all taxpayers.
Will the new plan impact divorce? You bet it will. One of the biggest reforms will significantly alter the way alimony is treated (spousal support in California) after December 31, 2018.
The new plan eliminates deduction and tax
Right now, those who pay alimony can claim a deduction on their tax return. The tax code considers alimony received taxable income.
The change is simple. The deduction is gone. The money received will not be taxed. This change applies to all divorces after Dec. 31, 2018.
The change in real numbers
Take John and Jane, a hypothetical couple. In their divorce settlement, John agrees to pay Jane $100k per year out of his $500k salary. If the divorce is finalized:
- Before Dec. 31, 2018: John’s net payment is $60k after the tax deduction. Jane receives a net $80k after paying $20k in taxes.
- After Dec. 31, 2018: John’s net payment is $100k. Jane receives a net $100k.
Finalizing in 2019 sounds great for Jane, right? Well, don’t forget that couples will likely take the new rules into consideration when coming to an agreement or arguing their side in court. Assuming John argues for $60k (the amount he would have paid pre-2019), Jane receives $60k ($20k lower than if she had paid tax on the pre-2019 amount).
Whether this will help or hurt divorce depends on the situation and who you ask. What is guaranteed, is that this reform will change the conversation.
Does this mean you should file today?
This answer is much like any other legal situation: it depends.
Experts from various fields predict that the deadline will cause a spike in divorce this year. That may be true, but it does not mean divorcing immediately is the best choice for you.
The details of your life, from your children (or lack-there-of) to your assets/debt, are unique. Your divorce will depend upon your individual situation, needs, emotions and wants.
The moral of this story: get good, experienced advice before rushing to a decision that you cannot undo.