The Republican tax law that went into effect in January ’18 will impact couples divorcing. One important change is that any agreements reached after December 31st, 2018, will not allow a tax break for alimony payments. That’s right, they will be taxable, beginning next year.
In addition, benefits for children and the values of privately owned businesses and partnerships will also be impacted—and anyone whose agreements will include these, should take careful note of the new law. It is actually wealthier Americans who will be most impacted by this law. Alimony deductions totaled more than $10 billion in tax year 2010 alone.
If you are considering divorce now, take a closer look at these 4 things ASAP before deciding.
Alimony, which has been deductible for the spouse paying it and taxable for the ex receiving it has led to underreporting on taxes. Those paying claimed payments were higher, those receiving, claimed they were lower. Under the new law the spouse paying alimony will be taxed on the full amount and the one receiving it will pay nothing. If you want to be under the old system, get that agreement finalized by year’s end, which means avoiding a drawn out fight in court.
Prenuptial agreements have been using clauses that allow the calculation of alimony based on years of marriage and language saying they are deductible for one spouse. The new law may not allow these clauses to hold up beyond the New Year, even though they are written agreements. If such an agreement is important to you, negotiate it now, before the end of the year.
Business valuation is the third consideration for this new tax law. Divorce settlements have always included how a business should be valued—but the new law overrides some of this with specific language. It increases the cash flow of certain pass-through entities, which is where the taxes on earnings are paid by the owner, not the company. This will raise their value. Increasing cash flow and reducing taxes will increase the value of the business—so whoever keeps the business will have to pay their spouse more. A business is usually the most contested asset in a divorce, and the numbers for settlement always come down to its value. This impacts child-support, which is generally only negotiated once and does not change. Therefore the value of a business will have a lot of impact on the final support agreements. This issues could greatly hold up a divorce settlement as the partners would want to see what happens with value in the next tax year.
The 4th and final consideration is other assets, and any tax benefits associated with these. Do you want part of a spouse’s retirement plan or is the house a better deal for you in the long run? How do you want to share costs such as college tuition with your ex? Should these things be based on who earns what or can they be traded off for other assets? Are there other assets that you need to carefully consider how to split up, given what their use/value will be some day, and any future downsides to them?
Divorce is serious business and getting an agreement that is both fair and help to protect your rights not only now but in the future, can be a challenge. Find a solid lawyer or an experienced negotiator, do your homework, and be open to compromise. If you can find a way to work together, rather than battle it out in court—both of you can emerge winners.