The Tax Cuts and Jobs Act passed in late 2017 stipulates that for all divorce agreements entered into after Dec. 31, 2018, an ex-spouse paying alimony will no longer be able to deduct it from his or her federal income taxes. The ex-spouse who receives alimony will potentially benefit since he or she will no longer have to declare alimony as income and pay taxes on it. In short, this new change in the federal tax law shifts the tax burden of alimony from the recipient to the payer.
This new law could make the already difficult divorce process even messier. Having the payer be able to deduct alimony from his or her income taxes was often a useful tool in settling cases out of court. With that tool now gone, divorces may become more protracted. In some scenarios, couples may not be able to divorce at all without the tax benefit.
Payers may also be able to argue effectively under the new law that they are not able to afford high alimony payments without the tax break, leaving alimony recipients with less than they might have received under the old law.
Pre- and post-nuptial agreements may also be affected by the new laws, which could nullify certain items. Those who have such agreements should have them reviewed by an attorney and a financial advisor to determine if any changes need to be made to comply.
In addition, the new tax laws affected deductions for dependents, eliminating the exemption parents used to be able to claim through 2025. However, the child tax credit has doubled, from $1,000 to $2,000.
The takeaway from these changes in the tax laws is that if you are planning to divorce soon, you should work with your attorney and your financial advisor to determine how your assets will either help or hurt you tax-wise. This should be done prior to undergoing property settlement negotiations so you have a clear picture of any tax downside certain assets may bring with them.
At Murphy & Cistaro, we are not only concerned with your divorce today, but also with your quality of life long after your case is over. Your family law issues deserve to be managed with dignity and respect. You can prepare to civilly resolve your divorce, heal, and move on with your life with a legal team that has helped individuals all over New Jersey to heal and prosper. Contact us today for your free consultation.