Hoge Partners, PLLC

How does the new tax law impact divorce settlements?

New tax law is not only affecting people’s standard deductions but also for the first time in 70 years, it is affecting the rules of alimony. While under the previous tax law, alimony payments were tax-deductible for the payer and counted as taxable income for the payee, beginning in 2019 the rule has changed. If you reached an alimony settlement after the first of the year, you will no longer be able to write it off as a deduction and the ex-spouse receiving it, will no longer have to report it as income. 

 

Other facets of the Tax Cuts and Jobs Act could affect your divorce as well

Alimony (legally referred to as spousal support or maintenance) is not the only part of a divorce that may be affected due to recent changes in the tax law. Other changes affect home ownership and how you can claim your dependent children. Mortgage interest deductions that were once capped at $1 million have now been reduced to $750,000, if the mortgage started after December 15, 2017. Deductions for state and local income taxes have also been limited to a cap of $10,000. 

Previously obtaining the house was considered a large part of a divorce settlement, but it might be wise to consider if you will be getting the tax benefits from it. If not, it may be a better option to consider liquidating the family home and seeking a portion of the proceeds. If you decide to sell your home, you may find additional tax breaks as well. You will be allowed to exclude up to $250,000 in capital gains if you are single. 

The child tax credit has also seen a change. Under the new law, the child tax credit per qualifying child has been doubled from $1,000 to $2,000. This credit will apply for any individual that makes less than $200,000. In a divorce, the ability to take the child deduction on your tax return will be determined by your settlement. 

Are there other options during a divorce?

If the new laws regarding alimony have got you on edge, you can consider other payment options in your settlement offers. One thing that divorcing couples could consider is opting for payments for property division instead of traditional alimony payments. An example of this would be a couple with a net worth of $2 million, opting to settle using multiple payments instead of alimony. To create an equal distribution, one spouse would make payments to the other until $1 million was satisfied. 

There are some things to take into consideration when making this decision. If the spouse making the property payments ends up in bankruptcy, the property payments could cease. Alimony payments would not be dischargeable under a bankruptcy filing, Additionally, if the payments from your spouse stop, you would only be allowed to garnish their wages up to 25 percent in a property division, instead of the 50% that would be allowed with failure to pay alimony payments. 

A final option is to provide the spouse with a one-time lump sum payment instead of creating an alimony agreement. This type of arrangement can be preferable to many people because it can eliminate the tension that ongoing alimony payments can cause between both spouses. Sometimes eliminating this tension can be the best way to save money and drama in a divorce. A good way to think of a divorce is that the harder you fight, the quicker the price of the divorce is likely to increase. Before considering any option, it is wise to weight the pros and cons of how the decision will affect you.

The most crucial thing to remember when going through a divorce is to set your emotions aside. While this can be easier said than done, it will make the process go much smoother and hopefully make for a quicker and easier settlement. It is also vital to seek out legal counsel that understands how the recent changes to the tax law can affect your divorce and provide you with the advice and negotiation skills you need to allow for the best outcome for your settlement. 

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Hoge Partners, PLLC
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Louisville, Kentucky 40202

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