Divorce is hard enough as it is. The emotional toll on the family is intense, and that's before you get to the paperwork and the money. The new tax law which took effect January 2019 will significantly impact your finances after divorce. To avoid making your divorce that much harder, you'll want to be prepared to deal with these issues early on.
If you have questions about the effect of the new tax law on your divorce and you'd like to talk with an attorney, call us at 256-770-7232.
Here's an outline from Forbes of the four hard hitting changes you'll want to watch out for:
1. Alimony as a Tax Deduction: A U-Turn
Alimony paid will no longer be tax-deductible and alimony received will no longer be taxable income. For decades, alimony — typically paid by men — has been tax deductible for the person paying it and taxable income for the person receiving it (typically women). But that basic tenet of divorce will no longer apply next year and beyond, due to provisions in the big 2017 tax law.
This could make the process of divorcing extra sticky, overly emotional and significantly uglier. The law change stands to be the biggest dividing issue in divorces in 2019 and, by some estimates, will raise $6.9 billion for the government over next 10 years.
As a result of the new tax treatment, high-income divorcing spouses will aggressively fight to pay less in alimony, since the government will no longer subsidize these payments via the tax deduction. (This could hurt finances for some women, whose income typically falls sharply after a divorce.) Lower-income spouses will likely fight to get as much alimony as possible, since the tax burden will be removed and the payments will go further.
Calculations by Boston University economics professor Laurence Kotlikoff in the Analyze My Divorce Settlement estimator from his company, Economic Security Planning ($99 per year for individuals), have found that the new tax law will likely result in smaller alimony payments.
2. Future Modifications May Not Be Grandfathered In
People who are already divorced will be grandfathered in, but if their agreements are modified in 2019 or beyond, they could be subject to the new rules, too. If the modification states that it is to be governed by the new rules, then the new rules will apply. If the modification says nothing, however, the old rules will apply.
Consequently, people should be extremely cautious when modifying divorce agreements in 2019 and beyond.
3. Prenups May Be Affected
Pre- and post-nuptial agreements may be affected by the tax changes, too. The new rules may nullify many of the items in such agreements, so all pre- and post-nuptial agreements should be reviewed by a financial consultant, an attorney or both.
Don’t get caught flat-footed and re-negotiate terms if necessary.
4. Children As a Deduction
One more thing couples divorcing in 2019 or after should keep in mind: Children won’t be the tax deduction they used to be. The 2017 tax law eliminated the $4,050 exemption for each dependent, through 2025. The child tax credit (which offsets taxes owed, dollar for dollar), however, has doubled from $1,000 to $2,000.
Remember, too, that the standard deduction has almost doubled because of the 2017 tax law. Single taxpayers in 2019 will see a standard deduction of $12,000; it was $6,350 in 2017. See Forbes for full article
Financial and tax issues in divorce can be complex, and its best to have a team you can count on during the process. Find an attorney and an accountant you trust to advise you wisely, to avoid costly mistakes. If you have questions about how these issues may change the outcome of your divorce, call us at 256-770-7232, we're happy to help.