A decision to divorce is never something that you should rush into. If you have decided that you want to divorce, however, you are in a unique time where rushing forward may have some significant tax benefits. Thanks to the Tax Cuts and Jobs Act passed earlier this year, there are a lot of changes to the tax code starting in 2019. One of the most important changes will directly impact how couples who pay alimony are taxed.
How Alimony is Currently Taxed
Under the current system, alimony payments are tax deductible if ordered by the Court or if the parties agree. This means that the person who is paying the alimony will have a reduced tax burden, which can save them a significant amount of money. The person who is receiving those payments, however, will have to claim them as income under the current system. Any divorces that are already in place as of December 31st, 2018 will be “grandfathered” in for future years as well (as long as additional changes to the law aren’t made).
Changes Starting in 2019
Starting with all divorces on January 1st, 2019, and beyond, alimony payments are no longer tax deductible. Likewise, the person who is receiving the alimony payments will no longer have to claim that amount as income. In some cases, this may reduce the amount that the receiving party has to pay in taxes each year but it reduces the money available from the Payor to assist the Payee as they now have the additional burden of paying taxes on all of their income.
What are the Benefits of Divorcing in 2018?
At first glance it may seem like the party who will likely have to pay alimony would want to rush forward with the divorce, but the party receiving alimony would want to slow the process down. The reality is, however, that any divorce agreements that take place in 2019 and beyond will have these new tax rules taken into account. This means the courts will likely reduce the total amount that that needs to be paid in order to compensate for the changes in tax law.
This does not, however, result in both parties having the same amount of money coming in regardless of when they get divorced. Since the person paying the alimony will be the party that makes significantly more money, the resulting increase in taxes will be much greater than the reduced amount paid by the receiving party. This is due in large part to the higher tax bracket the payer will likely be in. In fact, Congress’ Joint Committee on Taxation has estimated that these changes will result in $6.9 billion in new tax revenue coming in over the next 10 years. The end result is less money in the hands of both parties, and more money in the hands of the government.
We Can Expedite Your Divorce
While we would never recommend any couple rush into a divorce, it is absolutely a good idea to move forward quickly if you have already decided to divorce. If both parties are on the same page, we can expedite your divorce and get it completed prior to the December 31st deadline. Contact Vasquez de Lara Law Group to go over your options today.