Many Americans are well aware of the new tax reforms under the Tax Cuts and Jobs Act. One detail of the law that directly affects family law and divorce is that money paid to alimony or spousal support will be considered taxable income, and those who receive alimony payments will not have it taxed as income.
This is a major shift in a law that has been in place since 1942. The law will effect divorce negotiations and modifications now and in the future. Various news outlets including the New York Times have reported that financial experts and family law lawyers are encouraging the wealthy in particular to act fast if they are contemplating divorcing their spouse. The divorce must be finalized by January 1 to get the old tax breaks. The change will amount to an estimated $7 billion increase in tax revenue over the first 10 years.
About 600,000 Americans currently pay alimony. Of course, not all of them are wealthy, but according to the IRS the rich disproportionately take advantage of the tax break – 20 percent of alimony payments made are by the top 5 percent income earners who would otherwise pay the top tax rate of 37 percent.
Couples who are most impacted
Those couples who have the biggest income disparity between them will likely be hit hardest. The spouse being paid often receives a higher payment because they are actually doing their spouse a favor by lowering their tax obligations.
Couples earning over a combined $600,000 will also be affected – even though the so-called “marriage penalties” have been eliminated for the lower and middle class. This makes it less advantageous for high-income couples to file jointly, rather than dropping to a lower bracket and filing separately.
Married couples can only deduct $10,000 a year to pay state and local taxes, which is the same for single filers.
The circumstances of each divorce are unique
Divorces are as unique as the individuals involved, but it is wise for those in higher tax bracket to work with a law firm that has experience handling divorces involving complex finances. They and a team of financial planners and other experts can accurately determine the value of the estate, how to equitably divide it and determine how these tax issues can affect you.