New Considerations for Couples Going through a Divorce

Individuals thinking about divorce should be incorporating new tax rules in their plans. The recently enacted tax law impacts the taxation of alimony as well as the valuation of assets that are common in a divorce decree.

The biggest change, starting January 1, 2019, is that alimony will not be tax-deductible by the payor spouse and will no longer be considered income by the receiving spouse. In perhaps most situations, this change will have a negative financial impact as the alimony-paying spouse is generally in a higher tax bracket than the receiving-alimony spouse. As a result, the alimony-paying spouse receives more benefit than the receiving spouse. This will probably have the impact of lowering alimony payments – so the receiving spouse will be impacted as well.

The new rules do not go into effect until 2019. Divorces that are finalized prior to 2019 will be grandfathered under the old rules (payor can deduct alimony, recipient includes as income). Of course, given the acrimonious nature of divorce, settling during 2018 may be easier said than done. So, if the divorce will take place in 2019, be prepared to negotiate a different settlement.

In addition, the new tax law has added a qualified business income deduction as well as lower tax rates that impact businesses formed as pass-through entities (where business profits are generally passed through to the owner as opposed to the company). Since pass through income is now taxed at lower rates, it theoretically raises the value of the business entity which could be a factor in the divorce settlement.

Lastly, the maximum taxpayers can deduct for state and local taxes – including property taxes – is now capped at $10,000. In high-tax areas, the house now becomes more expensive to own (since you may not be able to fully deduct your property taxes). The tax cap will probably impact the division of property as the parties try to equalize the financial settlement.

The message is that the tax law changes increase the level of complexity that divorcing couples will have to consider.