If you are planning a divorce, talk to an adviser about how changes in the Tax Cuts and Jobs Act (TCJA) will affect your taxable income.
Under the new law, for divorce agreements executed after Dec. 31, 2018, payers no longer receive a deduction for alimony payments and recipients no longer have to include them in taxable income.
Arguably, if you will be making sizable alimony payments, you have an incentive to finalize your agreement before the end of the year in order to get the tax benefits. If you stand to receive alimony, you may want to delay in order to receive payments tax free.
Eliminating the divorce subsidy
Assuming the payer is in a higher tax bracket and the recipient is in a lower tax bracket, there are tax savings to be generated by passing the tax burden to the person in the lower bracket — assuming you file by year-end 2018.
Reportedly, the House Ways and Means Committee described the alimony deduction as a “divorce subsidy” because a divorced couple might pay less in their combined taxes than a married couple might. Repealing the deduction will add about $7 billion in new tax revenues over 10 years.
Impact on negotiations
The tax implications of an alimony payment should be factored into calculations and negotiations. Talk to your attorneys about each partner’s tax bracket and the net tax impact.
Some lawyers suggest that eliminating the tax deduction limits their ability to help clients find common ground by maximizing each party’s post-divorce financial situation.
Filing before year-end may provide you and your partner more options in settlement negotiations. Contact a financial professional with experience in divorce tax issues to understand your personal implications.