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Changing tax laws affect divorce negotiations

On Behalf of | Jul 23, 2018 | Divorce, Uncategorized

Tax laws that go into effect with the new year in 2019 could have a major impact on divorce settlements for New Jersey couples who decide to end their marriages. As part of the Tax Cuts and Jobs Act passed at the end of 2017, changes were introduced that effect how spousal support payments are taxed. The changes could have a particularly significant effect on divorce negotiations for wealthy couples, as the tax impacts are magnified in cases involving significant sums of money. As a result, many couples are scrambling to finalize their divorces before the changes go into effect. Any divorce finalized on or before December 31, 2018 will not be affected by the changes.

However, it is not possible for many couples to finalize their divorces before the end of 2018, and as a result, they will need to develop new strategies to mitigate the effect of the changes. Under current tax law, the payer of alimony can deduct the payments from his or her taxes. When the paying spouse earns a substantial income, the value of this tax deduction can cut a significant sum from his or her tax bill. On the other hand, the recipient pays taxes on the spousal support payments at their tax bracket, which is usually lower.

Under the changed system, this will be switched; no tax deduction will be available for alimony payments and the recipient will receive spousal support tax-free. While this may seem like a positive step for recipients, the changes are likely to lead to an overall reduction in spousal support payments.

There are a number of ways in which the tax law changes can be handled during a divorce. A family law attorney many be able to represent a divorcing spouse in negotiations in order to achieve a fair settlement on matters including alimony and property division.