Take a Breath or Run to Get Divorced in 2018? Alimony & the New Tax Bill
The new tax bill passed by Congress has all kinds of hidden nuggets buried deep within. One of those nuggets includes changes to the tax code that affects divorce settlements.
The big change that family law attorneys and couples considering divorce should consider: Under the old system, alimony payments were deductible by the payer and counted as income to the recipient. But under the provisions of the new bill, that changes significantly.
What does the new bill do?
- Alimony would no longer be deductible or taxable.
- The change is supposed to be a revenue generator. According to Congress’ Joint Committee on Taxation, it would raise nearly $7 billion over ten years.
The original version of the bill would have made the changes on Jan. 1, 2018, meaning many couples might have rushed to get their divorces filed by the end of the year. The final bill makes those changes effective for divorces filed after 2018, so couples thinking about splitting now have a little breathing room.
Since the partner paying alimony was usually the one with a higher income, the ability to shift income to the partner with lower income has historically been a way to realize a huge tax savings.
One potential result of this new regulation is couples being less interested in settling their cases. They won’t see the value and will choose instead to just go to trial.
Couples may not be able to afford to get divorced. The cost of setting up two households, without any offsetting tax benefits, might mean they’ll stay together. But it won’t be a happy household.