Divorce is already a painful process – there is no doubt about that. But now, that the new Tax Cuts and Jobs Act has scrapped the once popular and often-utilized alimony tax deduction, divorce negotiations may become even more tedious.
Until now, and for the last three-quarters of a century, as long as those of us on the planet can probably remember, the Internal Revenue Code (IRC) has provided a mechanism, which has allowed the payor spouse to enjoy a tax deduction for the amount of alimony paid to the payee spouse. The payee spouse would then have to include this alimony as income on his or her tax return, income which would be taxed at ordinary income tax rates. The IRC provides several guidelines under which the alimony can be deducted by one spouse and includible as income by the other, i.e. that it must be regular, recurring income that terminates upon the death of party.
The new law, which will be effective as of January 1, 2019, has effectively taken that alimony tax deduction and has thrown into the proverbial law trash can. It will be gone. Gone is the tax deduction for the payor, and gone will be the nuisance of having to include it as income for the payor.
So how will this effect divorce negotiations? During the settlement discussions, there are many areas that must be resolved in order for the parties to reach a global resolution. They are property settlement, alimony (sometimes called spousal support), custody (sometimes called parenting plans), child support and attorneys’ fees. (There can be other tangentially related issues too such as tort actions or injunctions but these are the five main areas of every divorce). Until now, that alimony deduction could be used as a bargaining chip which would help the bitter bill of having the pay alimony, be swallowed a little more easily, allowing it to be used for leverage, so that other areas could also be settled. Without this deduction, there will no longer be an incentive for the already reluctant potential payor to sign up for the monthly payment life sentence. Thus, the fallout of this may be a reduction in people who willingly sign on for this, and therefore a surge in cases that end up before the judge to be resolved.
The good news is that this new law doesn’t become effective until the first of next year, and it won’t apply to any cases that were settled prior the end of this year and are simply modified in the future. Another impact of this new law, is that we may see potential payors pushing to get their cases settled before the end of the year.
There is no doubt that the new alimony rules will be complicating an already traumatic, and sometime tedious process, and the change could result in more financial strain. Anyone considering a divorce should first check out my divorce programs at https://www.breakingfreefromdivorce.com, and then consult a qualified attorney or CPA for advice specific to your particular situation.