Divorce and taxes: 3 reasons to finalize before 2019

Tax law has changed. This piece discusses some of the impact of this change on divorce.

There are many factors to take into consideration that will impact the final divorce settlement agreement. One specific area to review is the impact of taxes on the divorce. Taxes often apply to the transfer of assets during the divorce. A failure to properly account for obligations to the Internal Revenue Service (IRS) when drafting the agreement can lead to some unintended tax implications.

Arguably, this fact has never been truer than it is right now. Those going through a divorce are at an interesting period in time. Those who can complete their divorce before the end of the year will fall under the obligations of the old tax code. Those who cannot will face the obligations of the new tax law.

As such, for those who are already in the midst of a divorce, it can be wise to attempt to finalize the agreement before the end of 2018. The Tax Cuts and Jobs Act (TCJA) has led to massive tax reform. Tax reform unseen for almost three decades.

Many of these changes will impact divorce settlements in the coming year - often negatively. Three specific changes to avoid by finalizing a divorce in 2018 include:

  • Alimony. Likely the biggest reason to finalize the divorce due to tax considerations is the change the TCJA caused in the treatment of alimony, or spousal support payments. Currently, the party making the alimony payment can deduct the funds from his or her taxes while the one who receives the payment is responsible for making the tax claim. The TCJA changes this rule. The TCJA has shifted the taxation of alimony from the party receiving the payment to the payor. This means the higher earning individual is no longer able to take a tax break and is instead required to pay taxes on the funds. This can lead to a major shift in tax obligations on the agreed upon alimony amount. In some situations, this translates to up to 50 percent in tax differences. Those who finalize the agreement before the end of the year will be governed by the previous law.
  • Property. The TCJA also made it more expensive to own a home. It reduced the deductibility of property taxes and changed the mortgage qualifications for interest deductions. Thus, the individual that chooses to keep the home and bear the financial responsibilities that come with home ownership will likely see a higher tax obligation than was present in previous years.
  • Children. The new law also eliminated the personal exemption amount. This means taxpayers do not get to use the multiplier that was present when taking a deduction for children on one's tax return, potentially resulting in a higher tax obligation than originally intended if the parties believed the benefits of the deduction remained when drafting the agreement.

Due to the complex nature of divorce it is wise for those going through the legal process to take steps to protect their interests. An attorney can help. Legal counsel can advocate for your interests and take the steps needed to better ensure all relevant factors are considered before signing off on a divorce settlement agreement.