The Tax Cuts and Jobs Act of 2017 is having a major impact on how divorcing couples handle property settlements, particularly when it comes to alimony and spousal support. The effects are particularly significant for wealthy couples with high-asset divorces, as the tax effects are multiplied in higher income brackets. The changes will go into effect with the dawning of the new year in 2019, and many wealthy couples are moving quickly in order to finalize their divorces under the existing rules, which will remain in place until December 31, 2018. As long as a divorce is finalized before the end of the year, the former spouses will continue to retain their current tax treatment.
Under current tax law, people who pay alimony can deduct the amount from their tax bill. For people with significant income, they can achieve major savings on their annual tax burden. At the same time, the recipient will pay taxes on the amount in their own tax bracket, which is usually lower. The result of this system has been an increase in the amount of spousal support payments.
When the new tax laws go into effect, this system will effectively be flipped. Instead, payers will receive no deduction for their alimony payments. In addition, recipients will receive the income tax-free. While this could appear to be a boon for recipients, it is likely to push down the overall amount of payments as there will be much less of an incentive to agree to increased alimony amounts.
Whether divorcing spouses are looking to finalize their divorce quickly to maintain current tax treatment or to develop solutions for 2019 and beyond, a family law attorney may be able to help. A lawyer can provide strong representation for a spouse that protects his or her interests and seeks to secure a just settlement on spousal support, property division and other matters.