How Trump's Tax Plan May Affect Your Divorce
The Trump Administration has made sweeping changes to the Tax Code and it will likely affect your divorce.
It is critical for divorcing couples to consider the tax implications when coming to an agreement to settle their divorce.
Spousal support is an aspect of a divorce that can have major tax implications for a divorcing couple.
Old Law
It used to be the case that the paying spouse could deduct spousal support. The recipient spouse was taxed on the spousal support received as part of his or her gross income tax. This meant that the paying spouse, usually the one in the higher tax bracket, could benefit from a tax deduction when making spousal support payments.
New Law
Effective January 1, 2019, the paying spouse cannot deduct spousal support payments made under a divorce or separation agreement (1) signed after December 31, 2018, OR (2) signed before 2019 but amended to expressly remove the spousal support deduction. The paying spouse is taxed on the spousal support payments at the rate of his or her applicable income tax bracket. The receiving spouse receives the spousal support payments tax-free.
For the vast majority of divorcing couple, the paying spouse is in the higher income tax bracket than the receiving spouse. This means that the overall tax liability between two spouses for spousal support is almost always higher under the New Law.
Pre-2019 Spousal Support Arrangements Grandfathered
If you have been making spousal support payments from before 2019, you may continue to deduct those payments. On the other hand, if you are receiving spousal support payments from before 2019 and want to start receiving it tax-free, you will need to enter into an amendment agreement with your ex-spouse to make that change explicit.
How the New Law Affects Your Divorce
Settling a divorce, rather than litigating it, has always granted couples more control over coming up with creative solutions to save money. With the new changes made to the Tax Code, mediation can provide you an even greater opportunity to structure your divorce in a way that saves both you and your spouse money.
In litigation, a judge decides how your assets and debts are divided and she is not necessarily required to consider the overall tax implications when dividing up your assets and debts (California judges are only called to consider “immediate and specific” tax consequences when dividing up a divorcing couple’s assets).
In mediation, you and your spouse are in control. You and your spouse will have the opportunity to structure the best possible agreement for your divorce, possibly with the lowest tax liability between the two of you.
Don’t let someone else decide for you how your divorce will look. We can help you take control over your divorce. Contact us at info@cordiallaw.com.