Divorce is stressful enough, but the new tax bill may ramp up the complications and anxieties for couples who are calling it quits.
Divorce experts are predicting a confusing, turbulent year, thanks to the tax plan’s reversal on who pays taxes on alimony. For more than 70 years, the tax law allowed the higher-earning spouse to deduct the alimony they paid to their exes, while the “receiving” spouse was taxed at a 15% rate.
But the new Tax Cuts and Jobs Act reverses that long-standing arrangement. Starting in 2019, the higher-income spouse will lose the alimony deduction and must pay federal taxes on it, while the receiving spouse won’t have to pay taxes. The new tax bill affects divorce agreements signed after Dec. 31, 2018, while divorces settled before that will be grandfathered in under the old tax bill.
Those dynamics may result in a tense year of negotiations for couples who are splitting apart as higher-earning spouses likely push for a settlement in 2018, allowing them to lock in a tax deduction. Lower-earning spouses may want to delay the settlement until 2019, believing the new tax law will benefit them, he said.
Where to start
Given the complicated mix of emotion and finances in divorce, it can be helpful to rely on a team of experts, including a divorce attorney, a divorce coach and a financial analyst with expertise in divorce. The analyst can help spouses understand how the tax bill will affect their settlement.
A detailed financial analysis can help put things in perspective, including how the new tax code will affect spouses. Examining a post-divorce forecast of your cash flow — and how the tax law will affect it — will clarify whether it’s possible to maintain your current home or where you might need to cut back, for instance.
Take a step back
A spouse who wants to argue for lower alimony payments based on the new tax code may want to examine how much their fight will cost in legal fees. The typical hourly rate for a divorce attorney is $350, although it can be as high as $1,000 an hour in big cities.
How it affects happily married couples
Married couples with prenuptial agreements should also pay attention to the new alimony taxation. That’s because most of those prenups likely include alimony provisions based on the prior tax law.
Those prenups probably have to change. If you are happily married, this probably isn’t even on your radar. But they’ll have a big ‘uh-oh’ moment if they go through divorce and have this in their prenup.