New Tax Law Will Make Spouse-Paying Support More Expensive – Divorce Law Blogs Posted by Daniel Forrest
Posted on May 29, 2018 in
Child custody, child support, divorce, family law, spousal support
The Tax Cuts and Employment Act contains many controversial provisions, but one of them will have a significant impact on many divorcing couples. The new tax law brings an unexpected change to a tax rule that has been the focus of American divorce for three-quarters of a century.
Many speculate that this change will make divorce settlements more contentious and make spousal support less generous in agreeing to alimony.
Change in the tax treatment of child support payments in 2019
For 75 years, the alimony paid has been deductible on the payer’s federal tax return. For the recipient, the alimony is considered taxable income.
This rule has eased the financial burden on divorced spouses who pay alimony, as the deduction reduces the amount of tax owed. The effects of the deduction can also put a child support payer in a lower tax bracket.
Beginning with the signed settlement agreements and divorces in 2019, different tax treatment will come into effect under the TCJA. In these divorces, alimony payments are no longer deductible and alimony payments received are no longer taxable as income.
Many people feel that this will make divorce negotiations more difficult because paying alimony becomes a greater financial burden when the amounts paid are no longer deductible, reducing taxes. And while it appears that if alimony payments were no longer taxable, it would be a big bonus for recipients, some commentators speculate that with downward pressure on premium levels due to resistance from new payers, many recipients will not be better off in the future will be in the long run.
Important timing issue
It is very important that anyone in South Florida (or anywhere else) currently involved in divorce negotiations or proceedings, anyone contemplating divorce, or anyone who suspects their spouse may initiate a divorce, do so as soon as speak to an experienced family lawyer if possible. Experienced legal advisors, after considering all the circumstances and the upcoming change in the law, may advise that the parties attempt to sign a settlement agreement or finalize the divorce in 2018 to avoid changing the tax treatment of alimony in 2019.
Some situations may justify waiting until 2019 and the new tax regime, although depending on the situation the opposite may be the case.
A prenuptial agreement is a legal contract signed by two people planning to marry and which becomes effective upon marriage. Prenups can cover many things, but a common topic is upkeep. For example, the parties may agree that a fixed amount will be paid as alimony in the event of a divorce.
The problem is that with the change in the alimony deduction, the agreed amount becomes more expensive for the paying spouse. Anyone who concluded a marriage contract before the new tax law would not have been able to foresee the unexpected change in the law at the time the marriage contract was concluded.
Any Floridian with a prenup who seems unfair given the upcoming tax law change should seek legal advice. The parties may be able to renegotiate the contract, depending on whether its terms allow for changes related to child support payments. A possible alternative could be that a party could go to court to request an amendment to the marriage contract on the basis of equity, meaning basic fairness.
In some cases, a marriage contract can be annulled by a court.
Another option might be to negotiate a post-nuptial agreement that changes the terms of the marriage contract.
In our office, we are ready to advise our clients on the impact of the change in the law on their situation and their possible legal options.