How The New Tax Law May Affect Divorce Negotiations
The new tax plan eliminates the alimony deduction, which may make divorce negotiations more acrimonious.
Lawmakers in Washington recently passed sweeping tax reform in a new law called the Tax Cuts and Jobs Act. While new tax law may not appear to have much to do with divorce and family law, as PBS Newshour reports, parts of this law could have a profound impact on how divorce settlements are negotiated. That’s because the new tax law eliminates an important federal tax deduction for spousal maintenance payments, a fact that could change how divorce attorneys negotiate settlements in divorce cases.
How alimony deductions will change
Under current law those who are paying spousal maintenance (also called alimony) can claim the payments as deductions on their federal tax returns. Those receiving spousal maintenance payments, meanwhile, pay taxes on that as income. After December 31, 2018, however, that will all change and those paying alimony will no longer be able to claim the deduction while those receiving the payments will no longer have to pay taxes on that income. While much of the tax law went into effect earlier this year, the elimination of the alimony deduction will only be applied to divorces filed on January 1, 2019 or later.
Less money on the table
At first glance, the fact that the recipient of the spousal maintenance will no longer have to pay federal taxes on that income would seem to present a financial boon to her or him. However, it’s likely that there will be less money on the table for both the person paying the spousal maintenance and the one receiving the spousal maintenance. The payor tends to be in a higher income tax bracket than the recipient; therefore the deduction he or she receives tends to be an incentive to pay spousal maintenance (or pay in a higher amount) and/or to pay out a larger property settlement in exchange for calling it maintenance and thus getting a tax deduction. With the elimination of the deduction, it is likely that the high-earning spouse will simply have less incentive for negotiating maintenance payments, leaving the spouse in need of maintenance either receiving less or having to go to court to request that the judge order spousal maintenance. This makes for a more divisive and acrimonious divorce. As Politico reports, it is also unclear how existing prenuptial agreements – many of which were written under the presumption that spousal maintenance payments could be deducted – will be affected by the new tax law.
There are many issues to consider in divorce negotiations, with spousal maintenance being just one of them. Anyone going through a divorce should talk to a family law attorney for assistance. An experienced attorney can help clients negotiate a divorce settlement that protects their best interests and better sets them up for success after their divorce.