Proposed Tax Law Changes Could Affect Alimony Taxation in Divorces
Whether you like the contents of the new tax or not, there are things you should be aware of. More than a few parts of the new bill will affect taxes, but one area that will affect the most people affects how alimony payments are taxed.
Divorces Call on Many Legal Areas
Law is a very compartmentalized field. That means that while an attorney may be experienced in one area, that doesn’t mean he or she has vast knowledge in other legal areas.
One place where this creates problems is in family law, where divorces often involve not just family law, but also tax law and estate law. Many family law practitioners may not be aware of how tax laws affect the agreements that they help their clients enter into.
Where there is big money at stake or large alimony or child support payments, or people being left into or kept out of wills or inheritances, estate and tax lawyers should be on call to advise as to the pros and cons of any proposed settlement.
Alimony Taxation May Change
The law now is that there is a deduction on income tax for those who pay alimony (it has always been treated as taxable income for the recipient). This tended to make it a bit easier to settle family law cases, as payors at least knew they would be getting a tax break on what they were paying out. And, because the recipient usually made less money, and thus might have been in a lower tax bracket, it made sure that most of the alimony payments stayed with the recipient.
But under the new tax bill, this is set to change. Now, the payor may not get the benefit of a tax deduction for what he or she is paying. This can have significant implications for divorce proceedings.
Considerations in Settlement Agreements
In many cases, the parties agree on lump sum alimony. This is a one time large payment. Now that there would be no deduction for this payment, one party may prefer to liquidate an asset and give it to the other spouse instead of paying alimony because property division is not taxable. In other words, instead of paying an ex money and keeping a valuable asset, there may be an argument to simply split (or sell and split the proceeds of the sale of) that asset.
Child support is calculated separately from alimony. However, a payor who once calculated a tax break for alimony that he could apply to making more child support payments may not be able to do this.
Because the IRS uses a very specific definition of alimony, language in settlement agreements will need to make sure that something that is not intended to be alimony is not accidentally or carelessly worded in a way that the IRS considers to be alimony.
It is important to note, however, that this would only apply to divorces made after December 2018. That means that couples looking to take advantage of existing tax laws may unfortunately have to rush to the courthouse to maximize how far their assets will go.
In any family matter you need good tax and estate advice. Contact Tampa estate and tax attorney David Toback to discuss your taxes or any changes in your life that may affect your tax burdens.