New tax laws will significantly impact divorced individuals in California and other states.
Signed into law in December 2017 and fully enacted in 2019, the Tax Cuts and Jobs Act will make alimony non-tax-deductible for the paying spouse, while the receiving spouse will be exempt from paying tax. The new law will apply to divorces finalized after December 31, 2018, and is expected to raise an additional $6.9 billion for the government over the next decade.
Family Lawyers Foresee New Laws’ Effects on Divorce
The tax deduction on alimony has often been considered as a divorce subsidy, an “incentive,” that allows the higher-earning spouse to provide more money to the lower-earning spouse. As a result, the recipient pays tax at a lower rate and is able to provide more for the family unit. Additionally, top earners in high-tax states like California and New York can save up to 50% in taxes, which means for every $50,000 in alimony paid, the after-tax to the payer will only cost $20,000.
Many divorce cases have not gone to trial because of this “divorce subsidy,” especially if the divorce is treading on contentious waters in the financial aspect. The American Academy of Matrimonial Lawyers (AAML) recently held a survey among its members where 95% of the respondents stated that the new tax laws’ enactment will significantly affect how divorces will be settled, while 64% of those surveyed expect that the new law will invite more belligerence between divorcing couples.
Despite these sentiments, members of the AAML suggest that it is wise to wait and see the actual impact, if any, of the new tax laws on family law.
Stricter Alimony Arrangements
What’s more apparent is the new laws’ effects on negotiations for alimony payments. With the new law, the lower-income spouse may receive less cash with more money going to taxes.
This is why family lawyers and tax attorneys in California highly advise divorcing couples to wrap up their divorce negotiations, if possible, and sign an agreement before the year ends so they can take advantage of a deductible alimony treatment. But if you are the receiving party, it makes more financial sense to finalize your divorce arrangements after 2018.
Divorcing spouses who want to take advantage of the current tax law must take note of the IRS’s strict requirements to qualify for deductible alimony, which includes, but are not limited to, the following conditions:
- The payment must be in cash, including checks or money orders.
- Spouses should not file a joint return with each other.
- Spouses must be legally separated under a decree of divorce or of separate maintenance.
- The payment must not be treated as child support or a property settlement.
If the requirements above are not met, alimony payments will be generally considered as child support or property settlement payments. These payments will be recognized as nondeductible personal expenses for the payer and tax-free payments to the recipient.
To achieve the fairest possible outcome, seek out the services of a CPA who can guide you with the financial aspect of divorce.