TAX CUTS AND JOBS ACT (TCJA) OF 2017 COMPLICATES POTENTIAL SETTLEMENT OF DIVORCE CASES

Leave a comment

The Tax Cuts and Jobs Act of 2017 (TCJA) enacted dramatic changes to several tax issues that directly impact how divorces are settled. If you are a high wage earner, or you’re married to one and you’re contemplating getting a divorce, there’s almost a sense of urgency toward you understanding the financial aspects of your divorce and when to file your marital settlement agreement, should you and your spouse reach one.

Heather L. Locus, an owner and wealth manager at Balasa Dinverno Foltz LLC in Chicago, defines on her Website why this could be important to you. “Many high-net-worth couples may want to move quickly in order to preserve some important financial options,” Locus writes. “Couples who finalize their divorce agreements this year have many more options since the most significant rules impacting divorce go into effect on New Year’s Day 2019.” Keep on reading!

PRESIDENT TRUMP’S DECEMBER 2017 TAX PLAN ELIMINATES DEDUCTIONS FOR ALIMONY PAYMENTS

Leave a comment

The burden of paying spousal support is about to reverse.  That’s because there’s a new tax law called, Tax Cuts and Jobs Act (TCJA), that was passed by Congress in December 2017, that has effectively abolished tax deductions on alimony payments beginning January 1, 2019.  Under the new Tax Cuts and Jobs Act, alimony payments will be neither tax deductible for the paying spouse nor taxable in the hands of the recipient spouse.

This new law will apply to payments that are required under divorce or separation instruments that are:

(1) executed after December 31, 2018, or,

(2) modified after that date if the modification specifically states that the TCJA treatments of spousal support payments (not deductible by the payor and not taxable income tax by the recipient) applies forthwith.

This new alimony provision is not retroactive, and it does not apply to divorces and separation orders entered into before 2019.

Until this new law, paying spousal support could be considered a “win-win” situation for both divorcing spouses.  The payor receives the benefit of a reduced tax obligation and the payee receives the benefit of more income than might otherwise be forthcoming if the payor spouse wasn’t receiving the benefit of the tax deduction.

This change in law could now prove expensive for individuals who must pay spousal support, because the tax savings normally derived from deducting spousal support payments can be substantial for high-earners.  One of the biggest disadvantages of the new tax law is that it could affect the desire of a higher-earning spouse to settle with their dependent spouse, since the deduction acts as a great motivator for the higher wage earner to agree to help support the spouse with less income in the first place.

WINDOW IS STILL OPEN

There is still a window for the payor to receive deductions for spousal support payments, but that window is closing.  If you are involved in divorce proceedings, or you are thinking about divorcing, and you want deductible spousal support treatment for some or all of the payments that you will make to your soon-to-be-ex, the TCJA gives you a huge incentive to get your divorce agreement wrapped up and signed by December 31, 2018.

On the other hand, if you anticipate being the recipient of spousal support, you have a big incentive to put off finalizing your agreement until next year, because the payments will become tax-free to you.

Either way, you should contact a specialist in family law, someone who is experienced in divorce tax issues, to get the best tax results for yourself.  Tax-wise, waiting too long could turn out to be an expensive mistake for years to come.

Lastly, be warned that many otherwise competent divorce lawyers are not up to speed on many of the new tax changes.  So don’t assume that just any family law attorney is capable of guiding you to the best tax results in your divorce.  Do your homework.  Contact a specialist in family law who is up to date on the latest tax changes that might affect you.  Find out who can best represent you regarding your spousal support requirements, and other family law-related issues.

PRESIDENT TRUMP’S DECEMBER 2017 TAX PLAN ELIMINATES DEDUCTIONS FOR ALIMONY PAYMENTS

1 Comment

The burden of paying spousal support is about to reverse. That’s because there’s a new tax law called, Tax Cuts and Jobs Act (TCJA), that was passed by Congress in December 2017, that has effectively abolished tax deductions on alimony payments beginning January 1, 2019. Under the new Tax Cuts and Jobs Act, alimony payments will be neither tax deductible for the paying spouse nor taxable in the hands of the recipient spouse.

This new law will apply to payments that are required under divorce or separation instruments that are:

(1) executed after December 31, 2018, or,

(2) modified after that date if the modification specifically states that the TCJA treatments of spousal support payments (not deductible by the payor and not taxable income tax by the recipient) applies forthwith.

This new alimony provision is not retroactive, and it does not apply to divorces and separation orders entered into before 2019.

Until this new law, paying spousal support could be considered a “win-win” situation for both divorcing spouses. The payor receives the benefit of a reduced tax obligation and the payee receives the benefit of more income than might otherwise be forthcoming if the payor spouse wasn’t receiving the benefit of the tax deduction.

This change in law could now prove expensive for individuals who must pay spousal support, because the tax savings normally derived from deducting spousal support payments can be substantial for high-earners. One of the biggest disadvantages of the new tax law is that it could affect the desire of a higher-earning spouse to settle with their dependent spouse, since the deduction acts as a great motivator for the higher wage earner to agree to help support the spouse with less income in the first place.

WINDOW IS STILL OPEN

There is still a window for the payor to receive deductions for spousal support payments, but that window is closing. If you are involved in divorce proceedings, or you are thinking about divorcing, and you want deductible spousal support treatment for some or all of the payments that you will make to your soon-to-be-ex, the TCJA gives you a huge incentive to get your divorce agreement wrapped up and signed by December 31, 2018.

On the other hand, if you anticipate being the recipient of spousal support, you have a big incentive to put off finalizing your agreement until next year, because the payments will become tax-free to you.

Either way, you should contact a specialist in family law, someone who is experienced in divorce tax issues, to get the best tax results for yourself. Tax-wise, waiting too long could turn out to be an expensive mistake for years to come.

Lastly, be warned that many otherwise competent divorce lawyers are not up to speed on many of the new tax changes. So don’t assume that just any family law attorney is capable of guiding you to the best tax results in your divorce. Do your homework. Contact a specialist in family law who is up to date on the latest tax changes that might affect you. Find out who can best represent you regarding your spousal support requirements, and other family law-related issues.