Family law implications under the 2018 Tax Bill

HOW THE NEW TAX BILL MAY AFFECT DIVORCES

In one of our previous posts we informed about the new Tax Cuts and Jobs Act (“TCJA”) and the major changes it brings, including the various adjustments in tax deductions. This article focuses on deductions applicable to alimony, as the new system may significantly affect and expedite divorce settlements in the months to come.

Alimony is a form of spousal support awarded by agreement or by court decision to the lower-income spouse after divorce, typically referred to as the “dependent” spouse. The courts have wide discretion in establishing the amount of alimony and the time period during which the higher-income spouse is obligated to pay. The purpose of alimony is to help the dependent spouse overcome the divorce and to at least partially maintain the standard of living the spouses shared during their marriage. To ease the burden of splitting one household into two, the alimonies were tax deductible – at least until now.

Currently, alimony payments are deductible by the payer and taxable as regular income for the recipient. The inverse of this will apply for any divorce or separation instruments that are executed after December 31, 2018. Under the TCJA, alimony will not be deductible for the payer and alimony recipients will no longer have to include them in taxable income.

Excluding alimony payments from tax deductions unites its regulation with child support. Other reasoning for this change is that divorced couples can sometimes achieve better tax results than married couples and that repealing the tax deduction will produce additional tax revenue. Some benefits will, however, remain the same for divorced spouses. If the couple was married for at least 10 years and the claimant remained unmarried after the divorce, he or she will still be able to claim spousal Social Security benefits (based on the earnings of an ex-spouse) upon retirement.

The new rules will not affect anyone already paying alimony, but if the spouses modify their divorce or separation instrument after December 31, 2018, they may opt in for the TCJA treatment. However, because the new system could make the divorce settlement negotiations much tougher, we may see quite the opposite trend where spouses try to wrap up the paperwork before 2019. Since the alimony payments will not be tax deductible at all, the TCJA gives a strong incentive for the paying spouses to get the divorce agreement completed by the end of 2018. On the other hand, the receiving spouse may want to wait until alimony will no longer be taxable as income. But even with this benefit, the receiving spouse may end up with less money than under the old system. Here you can read an example how the new system may affect the final sums paid and received by the divorced spouses.

If you are interested in learning how the new tax bill may affect you or your estate please do not hesitate to contact the attorneys at Chepenik Trushin LLP, who are ready, willing, and able to assist you with your estate planning needs. Bart Chepenik, 305-613-3548. Brad Trushin, 305-321-4946. Offices (305) 981-8889.