How the New Tax Law May Inflame Divorce Negotiations
01 February 2018IN: Family Law
Under the new tax law, divorcing couples may find a new road block in reaching an agreement on important issues
Calculation of alimony has always been complicated. It also varies state to state. One of the constants in this otherwise confusing areas of the law has been that alimony is deductible by the person who pays it and counts as taxable income for the recipient. The new tax law, titled the Tax Cuts and Jobs Act (TCJA), completely upends this. Under TCJA, alimony incident to any divorce occurring after December 31, 2018, will not be deductible for the payer. This is a huge change in the law and will likely have some far reaching impacts on divorce negotiations going forward.
Many people practicing in the area of divorce law rightfully fear that divorces will become messier under TCJA and the new tax treatment for alimony. Alimony payments can quickly add up and the tax relief that was previously offered payers was a significant benefit to help ease an otherwise very tense subject that needs resolution during divorce proceedings. On the issue of alimony, the alimony tax break was an incentive that would drive negotiations forward to an amicable resolution. Now, more divorce cases may need to go to court.
The new tax law also complicates divorce negotiations because the spouse being set up to pay alimony will be more inclined to pay less money to the recipient. Without the tax deduction, paying alimony is more expensive than it used to be. This means that the payer will have less money to offer.
In addition to stalled divorce negotiations, more people in unhealthy marriages may find themselves stuck due to being financially unable to divorce. The alimony deduction made divorce more affordable. It is a simple truth that the two household split resulting from divorce cannot operate on the smaller budget that a single family household manages. The alimony tax deduction helped ease the financial burden that comes with divorce. The higher earning former spouse, usually the one with the more substantial tax bill and the one paying alimony, would be transferring income to the lower earning alimony recipient former spouse with the less substantial income tax rate. In this way, the former alimony tax deduction had a way of distributing some of the financial burden incident to divorce to make divorce more affordable.
In sum, the new tax law will have some unfortunate consequences for those seeking divorce in coming years including:
- Lack of tax incentive for payer spouse to advance divorce negotiations;
- Lower alimony payments to recipients; and
- Inability to afford going through with the divorce.