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How tax law changes can affect divorce settlements

On Behalf of | Aug 28, 2018 | Divorce

People in Arizona who are considering divorce may wonder about the potential impact of tax reform on marital separation. The financial effects of divorce can be longer lasting and wider ranging than the emotional and practical changes, and this is especially true when it comes to taxes. The Tax Cuts and Jobs Act, which passed in 2017, contained a number of significant changes to the U.S. tax code. However, one area will be particularly important for people divorcing. The treatment of alimony and spousal support payments will diverge from 80 years of policy.

While the law will go into effect for all divorces finalized on or after the new year in 2019, the existing law will remain in place for all divorces finalized before the end of 2018. Under current tax policy, the person who pays spousal support can deduct those payments from their taxes at the end of the year. In addition, the recipient will pay taxes on the support as part of their income.

This system was often mutually beneficial to both parties and encouraged divorce settlements with generous alimony. Under the new law, the payor will no longer receive a tax deduction for alimony payments while the recipient will no longer be taxed on spousal support.

This may seem to benefit the recipient, but it runs the risk of driving all payments significantly downward and making it far more difficult to negotiate a financial settlement. A spouse going through a high-asset divorce can work with a family law attorney to develop creative settlement options that continue to provide tax benefits while protecting key assets. A lawyer can fight for a fair outcome in terms of property division, spousal support and other key issues.