Divorce Can be Taxing… Literally

May 23, 2018 by Gordon Advisors

divorce tax

The Tax Cuts and Jobs Act made significant changes to many areas of tax law including eliminating a long-standing provision allowing a deduction for alimony payments to an ex-spouse.

There is no change in the tax treatment for alimony payments required by pre-2019 divorce agreements. On the other hand, for payments required by divorce agreements effective after 2018, the new law eliminates the deduction for alimony payments. Recipients of alimony payments will no longer have to include them in taxable income.

This could be a huge incentive for divorce minded individuals expecting to pay alimony to get divorce agreements wrapped up by 12/31/18. Conversely, if you will be the recipient of the payments, putting off the finalization of your agreement to 2019 could save you tax dollars. This tax law change forces divorce attorneys to consider tax consequences when handling a client’s divorce. Some divorce experts worry that the change will make negotiations tougher and lead to less alimony support since more cash may end up going to taxes.

If a high wealth divorce minded spouse expects to pay and deduct $50,000 in alimony, his federal tax savings from alimony payments could be as high as $18,500 in 2018. Divorcing by the end of 2018, secures his or her tax deduction for alimony for future years as well. If the divorce is not finalized until 2019, the alimony payments will not be deductible.

Many otherwise competent lawyers fail to consider the tax consequences of payments made pursuant to a divorce agreement. Working with Gordon Advisors during the divorce process can help you to understand the real tax consequences to your divorce. If you think the new rules related to alimony payments might end up affecting you, we can help.