New Alimony Tax Laws
This year brought new tax laws, following President Trump’s Tax Cuts and Jobs Act of 2017. In my world, the biggest impact of these new tax laws is how it impacts divorcing couples where alimony is involved.
Read about it here.
It used to be that when a divorced spouse paid alimony, the payor could claim 100 percent of that payment as a deduction against earned income. It also meant that the recipient had to pay taxes on that money as income, but presumably at a lower tax rate than the payor.
New Tax Law Deductions
That’s no longer the case! The new tax law removes the tax deductions and implications on both sides. So, the payor is paying taxes on those monies he or she actually earned. It used to be that tax laws in divorce shifted the tax to the lower income earner. We are no longer able to shift the tax burden.
This lands the entire family in a situation where there is less money to go around.
During the last half of 2018, clients were eager to finish their divorces so they fell under prior tax laws. Now we’re in new territory, and our negotiations have to change.
There was so much stress and tension surrounding the idea of the impending changes, trying to figure out how we needed to change the details of divorces going forward. The fact is, these are the facts, this is the situation we have, so we have to make the best of it.
Frankly, divorcing couples must change their expectations for the way their divorce is going to unfold. In my practice, I always tried to look at alimony in real dollars – what a client might receive after paying taxes, or how much of a deduction a client might have when paying alimony.
It’s a total pot of how much money you have, and it remains so. Like I did in the past, I continue to give my clients a more realistic number, so they can see the full picture.
Negotiations remain the same as they always were. Now, we are trying to find ways to still derive a tax benefit, and thus far, we’ve found one workaround that works in some cases. Ultimately, we must work with financial professionals who are skilled in tax law as it applies to divorce, to figure out a new solution, get creative, and find creative solutions to make things better for our clients.
With any change, we must get used to the new way things are, and accept the change as a different way of doing things. It’s not like we have a choice, after all! Making peace with the details is one step toward healing the dissolution of a marriage and stepping wholeheartedly into the next phase of life.