It has been nearly six months since the White House Administration signed the Tax Cuts and Jobs Act (the Act), signed (enacted on December 22, 2017). The Act has many notable changes in tax reform but perhaps overlooked is the effect it could have for withering marriages. For those in the midst of or seeking a divorce and those who need to modify documents from a prior divorce, pay attention, as the Act enforces new considerations for any divorce or separation initiated after December 31, 2018.
What Does This Mean?
An article in the Journal of Financial Planning explains that the Act repeals the above-the-line deductions for alimony, a court-ordered requirement for a spouse to continue providing financial support after a divorce or separation. Under the Act these payments are now non-taxable to recipients.
Ultimately, this means that alimony is no longer tax deductible for the paying spouse and does not need to be reported as income by the receiving spouse.
In some divorce or separation cases, individuals may need to line-item specific items differently than they may have in the past. For example, if soon-to-be ex-spouses were in different tax rate brackets prior to December 31, 2018, it may be beneficial to structure the divorce agreement such that different items, such as child support, property settlement, and the spouse’s legal fees are treated as alimony (either all or a portion of it).
This change to the federal taxable outcomes of divorce or separation agreements may have a ripple effect. At the state level, courts will have to adjust their child support and alimony. On an individual level, this change may mean that fewer spouses may be willing to pay alimony. Instead, they may decide to pursue other forms of payment such as non-taxable property settlements and child-related credits.
THE BOTTOM LINE:
While the full effect of the Act are still to be determined, if you are in the midst of a divorce, it’s important to know how your settlement decisions can impact the outcome. Make sure your financial planner is fully aware of all the considerations and potential conflicts surrounding your divorce; this will ensure they help you develop the best short- and long-term plan to safeguard your personal assets and future net worth.
