Separated spouses are going to have to make a decision in the next five days: do you want to pay your future ex, or the government? Come January 1, 2019, for the first time in over 70 years, alimony will not be tax deductible. What does this mean? If you finalize your divorce after the strike of midnight on December 31, 2018, you will be paying the government AND your future ex big money for many years to come.
Alimony Payments Will No Longer Be a Taxable Event
According to tax law changes in the Tax Cuts and Jobs Act of 2017, divorce settlements entered into after December 31, 2018 will be subject to new tax laws. These laws do not allow for alimony payments to be tax deductible. This means that if you make $200,000 per year, you will get taxed at that rate, regardless of whether you pay alimony or not.
Traditionally, a divorcee’s net income would be calculated based on gross income minus alimony payments, But not anymore! This could add up to some big tax payments for many individuals, leaving them with very little disposable income after paying out alimony. This may cause many middle class families to think twice before getting a divorce, and that might just be the reason for the tax law change. Of course, another reason is big money for the federal government. The Joint Committee on Taxation estimates this tax change will increase federal tax revenues by $7 billion over the course of a decade.
Many divorce attorneys and family court judges are working around the clock trying to finalize as many divorces, and settlement amendments, as possible. Even if you are divorced prior to January 1, 2019, if you ever go back to court for changes to your alimony settlement, you will be subject to the new tax laws. Therefore, divorce attorneys are meeting with old and new clients, trying to make any necessary adjustments before the new year.
The Wealthy Will Still Have Options
It seems that this new law can be worked around easier for the rich than for the poor and middle class. Many divorce attorneys are recommending that those getting divorced after January 1 avoid these new “tax penalties” by avoiding alimony altogether. One way to do this is by giving a disproportionate amount of property and cash through an upfront payout.
The spouse that is the primary breadwinner, and therefore the alimony payer, can estimate future earnings, divide that number by whatever both parties agree upon, and pay the other spouse outright at the time of divorce. Think of it as “paying it forward,” but with not-so-nice intentions. However the only people that can afford to pay it forward are those with deep financial assets to have the wherewithal to pay virtually half of their future earnings today, in addition to giving potentially half of their current estate, and probably also buying a new house. Therefore the $7 billion could be coming from the families that can least afford it.
If you are contemplating divorce, you may want to talk with your divorce attorney about finalizing before New Year’s Eve. You may have to pay your attorney overtime, but it could well be worth your while!