The Tax Cuts and Jobs Act will dramatically change the negotiations for spousal support for any divorce to be finalized after the end of 2018.
In most situations, a person who is considering a divorce or even actively in the midst of a divorce in California is not encouraged by others to rush into things or hurry to get the divorce completed. However, there may be some couples that actually benefit from ensuring their marriage is legally ended before the end of this calendar year.
New tax law a big game-changer for divorces
Titled the Tax Cuts and Jobs Act, the new tax law that goes into full effect on January 1, 2019 has implications for many areas of life-including divorce. For nearly eight decades, spouses who made alimony payments after a divorce were able to deduct the amount paid from their federal income tax returns. At the same time, the spouses who received these monies added the amounts to their federal income tax return.
For any divorce signed and finalized by December 31, 2018, the above taxation of alimony payments will remain in effect. However, turn the calendar to the new year and that reality is a distant memory. A spouse ordered to pay alimony must not only fork over a lot of money to a former partner every month but also pay income tax on that money.
The New York Times indicates that couples who have spousal support provisions in their prenuptial agreements may feel that they are safe from this change. That may well be the case but it is unclear at this time if an existing marital contract will have the ability to override federal tax law.
IRA transfers may be an option
According to CNBC, some couples might find that transferring one spouse’s individual retirement account to the other spouse is a preferred way of accommodating an alimony obligation.
Because an IRA is funded with pre-tax dollars, the person who transfers the account avoids the ultimate payment of income tax on the money just as they would have with spousal support payments under the existing tax code. If the recipient spouse is over 59.5 years of age or is not in immediate need of the funds, this may be an acceptable solution. However, if that receiving spouse does not meet one of those criteria, they may not find this acceptable.
Filing designations on the table
Divorcing couples with children in the past have sometimes elected to share the child tax credit by taking turns on which parent claimed a child as a dependent. Kiplinger indicates that it is not known yet if this will still be allowed going forward. Couples may need to assume that only one person will enjoy this benefit ever.
Another factor able to make a difference on a tax return is whether a person files as single or head of household. This determination may be another point of negotiation for couples who are not able to finalize their divorces in 2018.
Legal input is necessary
Divorce is a legal event and the need for proper counsel is always important. However, in light of the dramatic changes afoot, divorcing California spouses are encouraged to contact an attorney before making any final agreements.