What The New Tax Plan Will Mean for Divorce

Feb 21, 2018 | Blog

Couple in Divorce CourtIn late 2017, President Trump signed a tax bill that is set to change the tax code considerably. Family Law is one area that has been affected by the new tax codes. Alimony payments have undergone some changes that experts predict will have a critical impact on how couples negotiate divorce settlements. The tax code changes take effect in 2019, so couples planning to divorce only have 2018 to reap the benefits of the current tax laws.

Where the Divorce Difference Lies

The new tax bill gets rid of the alimony deduction that was allowed for the higher-earning spouse, and the recipient is not required to pay taxes. Before these changes, the requirements were reversed. The spouse paying the alimony could deduct it and the one getting it had to pay 15% tax. With the new laws, spousal support and child support will be similar. The structure of the current alimony payment system allowed couples to have more money between them, which made it possible to afford separate households. This new system will give the government a larger share of a couple’s money than before.

To put it in numbers, if one spouse pays alimony to the tune of $100,000 in a year, this amount would be deducted in full under the old taxation structure. At the highest tax bracket rate of approximately 40%, it means that this spouse will have spent $60,000. On the other end, the recipient pays 15% on the $100,000 and is left with $85,000. With the new tax bill, the higher earning spouse would have to pay the $100,000 without any relief.

The Cause of these Changes

This alimony deduction, according to the House Ways and Means Committee, is a “divorce subsidy.” It is a technique to cover the tax cuts that come with the new bill, which are approximated to be in the vicinity of $1.5 trillion. The tax writers had to find ways to bring in revenue and alimony is one method. Estimations by the Joint Committee on Taxation reveal that the deduction repeal will raise $6.9 billion towards the $1.5 trillion tax cut.

The Potential Repercussions

Matrimonial lawyers figure that the new changes will make divorce negotiations that much more difficult. For one, because higher-earning spouses do not have any tax advantages to look forward to, they will be more careful about how much they give. The payer has a bigger financial burden to bear under the new tax bill, which can complicate settlement talks. In the original draft, the new changes were supposed to take effect at the start of 2018, and that saw a lot of people rush to their lawyers to finalize their divorces. The reconciled bill gave divorcing couples until the end of 2018. What this means is that parties that benefit from deductions will rush to pay alimony while those who pay taxes may want to extend negotiations.

Does the Lower Tax Burden Matter

Under the newly signed tax reform bill in 2018, individuals will incur less federal income tax than they did in 2017. This change may also affect how a party pays spousal support. Alimony calculations take into consideration how much net income a party makes. With lower federal tax, the net income will increase, which means that a party would have to pay a higher percentage of spousal support.

The effects of the new tax bill will be felt for a considerable while as the involved parties try to adapt to its implications. In states like New York where judges and courts have significant latitude when calculating alimony, it is hard to predict how these entities respond to the changes. The new spousal support payment structure may affect how parties handle divorce, but it is not the only element that comes into play in these situations.

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