Tax Law Changes & Divorce Settlements

People in Charlotte considering divorce may wonder about the impact that tax reforms will have on the end of their marriages. Divorce can bring significant changes to people’s annual tax returns, and the types of changes will soon themselves be strikingly different. Tax reforms passed into law as part of the 2017 Tax Cuts and Jobs Act will go into effect in 2019, reversing the way that alimony and spousal support have been treated in the U.S. tax code for almost 80 years.

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While the changes will affect people who divorce on or after New Year’s Day in 2019, the existing law will remain in place for everyone who finalizes their divorce before the end of 2018. As a result, some people wary of the new procedure have been rushing to conclude their divorce before the turn of the year. Currently, people who pay alimony can deduct the amount paid from their annual tax returns. In exchange, recipients pay taxes on the income at their own, usually lower, tax rate and can also invest those funds in certain retirement funds. This provides significant benefits to both parties and can encourage a generous alimony payment in a divorce settlement.

With the implementation of the new law, payors will no longer be able to deduct their spousal support payments from their taxes, eliminating a major incentive for an alimony agreement. Recipients will no longer be taxed on the income at all. While this could appear to be a windfall, the changed policy could delay many divorce settlements.

People who are concerned about the impact of changing tax legislation during and after a divorce may wish to consult with a family law attorney. A lawyer may provide representation during a high-asset divorce in efforts to protect key assets and achieve a fair settlement on property division, spousal support and other matters.