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Divorces affected by changes to tax laws

When people in Illinois think about divorce, they may not consider the tax implications. However, the Tax Cuts and Jobs Act, passed into law in December 2017, has several significant effects on how taxes are handled for divorced people. One of the most important changes concerns the taxation of spousal support payments. Currently, and for the past 80 years, the person who pays alimony to a former spouse is able to deduct the amount from his or her annual tax return. The recipient, on the other hand, pays taxes on the income in his or her tax bracket.

This tax system has been beneficial to both sides, especially when wealthy couples with high-asset divorces are involved. The tax benefit of the deduction can be significant for a payer in a high tax bracket. On the other hand, the recipient receives larger payments and is also able to invest that money in IRAs and other accounts designed to receive taxable income. Because of this mutual benefit, a number of divorce negotiations have concluded successfully. However, as 2019 dawns, this system will be reversed.

Alimony payments will no longer be tax-deductible for the payer, removing a significant incentive to provide ongoing spousal support after divorce. In exchange, the payments will be tax-free for the recipient. While this will boost the annual intake of the IRS, it could make it much more difficult to settle a contentious divorce, especially when significant funds are involved. Many couples are rushing to finalize their divorces in 2018 in order to preserve the current system.

The financial effects of divorce can linger long after the papers are finalized, especially when taxation is involved. A family law attorney may work with a divorcing spouse to provide strong representation, fight to protect key assets and strive to achieve a fair settlement in terms of property division and spousal support.