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New Tax Law May Cause Divorce Rush in 2018

Posted on in Spousal Maintenance

New Tax Law May Cause Divorce Rush in 2018The recently passed federal tax reform law will do away with the popular alimony tax deduction for all divorces that are completed after Dec. 31, 2018. According to the IRS, about 600,000 people claimed the deduction in their 2015 returns. Spousal maintenance agreements that are created before the end of the year will still be able to claim the deduction in the future. Thus, some couples feel that they are facing a deadline to complete their divorces before the new law goes into effect.

What Changes

With the current tax laws, the person paying spousal maintenance after a divorce can deduct the payments when filing his or her taxes. In turn, the spousal maintenance recipient must report the payments as taxable income. The new tax law makes spousal maintenance payments tax neutral in the same way that child support payments are. The payer will no longer claim the deduction, and the recipient will not pay taxes on it.

Why It Matters

The law could be viewed as a win for spousal maintenance recipients. However, there are consequences to eliminating the deduction that may complicate future divorces:

  • Unlike child support, the amount of spousal maintenance is negotiable between the divorcing parties. The tax deduction is an incentive for payers to reach an agreement;
  • Because the payer is often in a higher tax bracket, he or she may lose more money from not having the deduction than the recipient will gain from the tax-free income;
  • If a court is left to decide on spousal maintenance payments, the lack of a deduction may cause it to award less money than it would have before; 
  • While high income maintenance payers can save the most money using the deductions, low income payers may be more reliant on the deductions; and
  • Couples may need to revisit their prenuptial agreements if the agreed-upon spousal maintenance assumed there would be tax deductions.

Overall, the law change is expected to make negotiating spousal maintenance more difficult, which will draw out the divorce process.

Your Consequences

A year seems like a plenty time, but that may not be the case with your divorce. If you and your spouse cannot negotiate amicably, your divorce could take longer than a year to complete. It would also be unwise to rush your divorce to meet a deadline because you risk overlooking important details that could have financial consequences. A McHenry County divorce attorney at Botto Gilbert Lancaster, PC, can discuss how the changing tax law may affect you. Schedule a free consultation by calling 815-338-3838.



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