Tax Reform: Could 2018 Be The Year of Divorce?
Divorce, often fraught with emotional and financial quagmires, could become even more contentious as a result of the Tax Cuts and Jobs Act. It’s been a long-standing provision of tax law that any spouse paying spousal support may deduct payments from their taxes. That will change for couples whose divorce decree is finalized after December 31, 2018, when alimony recipients will no longer be required to declare payments as income on their taxes, according to the IRS, and the burden falls squarely on the payer.
Alimony can be a source of contention in even the most amicable divorces, but now the timing may be a sticking point. If a spouse is negotiating for alimony, reaching a resolution with their partner could mean:
- Agreeing to finalize the divorce in 2018, so the payer can deduct spousal support on their income taxes for as long as they continue making alimony payments
- The payee may stall divorce proceedings to avoid getting handed the tax bill themselves in 2019 and beyond
- The couple may seek to revise an existing decree to align with the new law if, for example, the spouse receiving alimony under the current law can’t afford the taxes
Regardless of how a divorcing couple chooses to engage with the new tax legislation, it will have a huge effect on Americans who pay or receive alimony. According to the IRS, in 2015 more than half a million people who claimed the alimony deduction received over $12 billion.1
A Bit of Background on Alimony and Its History
The transference in tax burden mirrors the federal government’s method of child support taxation, which also places the responsibility for taxes on the payer. The shift in accountability comes decades after the IRS began requiring the spouse receiving alimony to pay income taxes on spousal support payments.
Some might argue placing the tax bill with the spouse required to pay, or is considered at fault for the dissolution of the marriage, is more in keeping with the spirit of alimony. Historically, the practice of allocating financial support to a wife was “due to the fact that women had no property rights during the marriage. Courts often used the value of…property as the basis for determining the amount of alimony to award.” However, the Equal Protection Clause of the Fourteenth Amendment defined awarding alimony based on a spouse’s gender as discriminatory. In today’s courtroom, the practice of awarding alimony has evolved beyond a means to create financial equity and into “a way to award damages to an injured party or monetarily penalize the person responsible for causing the emotional pain during the marriage.”2
Understanding how new tax laws will impact clients is just one hill to negotiate in the financial landscape of divorce. Helping your clients stay organized, prioritizing what needs to be disclosed and making sure they feel secure enough to ask about various statements and accounts are all critical elements for making this difficult transition go as smoothly as possible.
Help your clients turn a trying life event into an opportunity for a fresh start and financial empowerment with tips from the Knowledge LabsTM Women and Divorce checklist.
Click here to find the current guidelines and forms for reporting alimony.
Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice.
Knowledge LabsTM programs are for information purposes only. There is no guarantee that the information supplied is accurate, complete or timely, nor is there any warranty with regards to the results obtained from its use.