Leading up to the end of 2018, there was a race, not to the Courthouse but out of it. Spouses who had already filed for divorce, whether recently or those who had long-pending cases, and whom would be responsible for paying alimony were actively racing to finalize their cases prior to the end of the year. The reason: the changes to the tax code implemented by the 2017 tax law.
For decades, a long-standing staple of alimony negotiations was the subsidizing effect of payments that were tax-deductible to the paying spouse and taxable as income to the spouse receiving alimony. This dynamic helped facilitate negotiations that are often difficult for the parties, both financially and emotionally. Previously, the deductible nature of alimony incentivized a paying spouse to agree to a larger number because doing so would result in a tax benefit down the road for the length of the alimony award. This was especially useful when trying to reconcile each spouse’s perception and preference as to what number was fair and reasonable based on the couples’ particular circumstances.
Individuals seeking to dissolve their marriage in a post-2018 landscape will be some of the first to experience negotiations that exclude this useful incentive. However, it is important to keep in mind that while the paying spouse will no longer have the option to deduct their alimony payment, the spouse receiving the alimony award will no longer have to claim these funds as income. Previously, a rationale for asking for a higher alimony award was due to alimony being taxable to the receiving spouse. This meant that the number agreed to on paper, depending on the individual’s tax bracket, could constitute a very different net amount once taxes were considered. Under the new tax code, the number agreed to will be the amount that will be paid to the receiving spouse. There is no longer any ambiguity as to what these funds will look like at the end of the year. It is possible that this dynamic, too, may rise to be a useful aspect of the new tax laws when spouses are negotiating the topic of alimony.
The 2017 Tax Law brought with it several changes that will reverberate in countless ways across all economic classes of individuals. The same is true when applied in the legal arena of family law. The deductible/taxable nature of alimony was not the only change to come about. For example, the new tax law has eliminated the previously existing exemption for dependents, while also increasing the child tax credit. It is important for individuals considering divorce to educate themselves about the new changes and, prior to seeking legal counsel for their dissolution of marriage, speak to an accountant, financial advisor or requisite professional to gain awareness of any resulting implications in order to determine what financial strategy is best suited for his or her circumstances. Doing so will alleviate the stress of the unknown and will assist individuals seeking a divorce in providing their Family Law attorney with information necessary to help accomplish the financial goals a spouse hopes to attain in their family case.