Tax Incentive Encourages Couples to Divorce This Year
For couples considering divorce, the tax code is incentivizing spouses to do so sooner rather than later. As part of the tax code overhaul, any divorce settlements or modifications that take place after December 31, 2018 will no longer have the tax break for alimony payments. Otherwise known as spousal support, prior and through this year spouses were able to deduct alimony payments from their taxes. For couples where one spouse earns considerably more than the other, the tax implications of waiting to divorce after the new year could be extremely significant.
Alimony Payments Under the Current Code
Prior to the change in the tax code, the spouse paying the alimony has been able to deduct those payments from their tax bill. This potentially amounted to a significant tax break if the earnings gap between the spouses was considerable, and there is no ceiling to the amount that can be deducted because of alimony payments prior to calculating taxes. According to the IRS, around 600,000 people in the United States claim this deduction every year, and around twenty percent of those people are in the top five percent of income earners nationwide.
Under the current code, the spouse making more money would typically negotiate a higher alimony payment to their spouse in exchange for other marital assets in a divorce because the spouse sending alimony payments could deduct that amount from their taxes at the higher tax bracket, and the spouse receiving the alimony payments would be taxed for the alimony payments received under a lower tax bracket.
Tax Implications Under the New Code
Under the new code, the incentive to provide a higher alimony payment to a lesser earning spouse is now eliminated. The Joint Committee on Taxation expects that this change will increase federal revenues by $7 billion over the next ten years. Experts expect to see the higher earning spouse negotiating harder to pay less in alimony in order to make up for the loss in the tax break. They also warn that the change in the tax code will disproportionately affect women in divorce cases, who are more often the recipient of alimony payments after a divorce and often face significant income decline after the dissolution of marriage.
The change in the tax code also has implications for the welfare of any children involved in divorce cases that happen after the new year. Child support payments are not tax deductible, and that will not change. However, in addition to alimony payments no longer being tax deductible, any unallocated support that is meant to help both spouse and child will also lose its tax deductible status starting in 2019.
A New York Divorce Attorney Can Help
The recent overhaul of the federal tax code has significant implications on all divorce going forward, and you need to be aware of how the tax change could affect your divorce decree. If you have questions regarding divorce in New York City, call or contact one of our experienced divorce attorneys at The Mandel Law Firm today to discuss the specifics of your case.