Historically, alimony (often referred to as spousal support or maintenance) has been deductible by the payor and taxable to the recipient. This benefited the family because the recipient paid tax at a lower rate than the payor deducted it at allowing the family as a whole to pay less tax so each spouse could end up with more in their pocket. For divorces finalized after New Year’s Day 2019, alimony will not be deductible by the payor or taxable to the recipient. This will be the same tax treatment child support has had in the past and will continue in the future. This is a permanent change and will likely result in the recipient of spousal support receiving less money.
There is a window of opportunity as spousal support paid in 2019 and beyond based on divorce agreements finalized before 12/31/2018, will still be deductible by the payor and taxable to the recipient. In addition, modifications to those agreements will retain the deductibility/taxable status unless the modification expressly provides that the new law applies going forward. This is strong motivation for those who are in the process to finalize their divorce before the ball drops on 2018. This lack of taxability/deductibility going forward will likely result in non-working divorced spouses no longer being eligible to make IRA/Roth IRA contributions.
In addition, the personal exemption was reduced from ~ $4,000 to $0 for all families from 1/1/2018 – 12/31/2025. While the exemption amount is $0, it is still valuable to negotiate in the divorce which parent gets the exemption for children because it may qualify the parent for additional tax credits and the exemption is supposed to go back to ~$4,000 in 2026.
Pre- and Post-Nuptial Agreements
Couples with Pre-nuptial or Post-nuptial agreements should have their agreements reviewed this year to assess the impact of the law.
Another factor in divorce impacted by tax reform is home ownership. While the government left the rules and dollar exclusions on gains from selling a residence the same, the reduction in deductibility of property taxes and the amount of mortgage that qualifies make it a very good idea to analyze whether to sell the marital home before the divorce is final and either downsize or rent.
Balancing the family dynamics during a divorce to create a healthy restructuring of the family is never easy. The new laws have added an additional layer of complexity and urgency. Our book “The Next Chapter – A Practical Roadmap for Successfully Navigating Through, and Beyond, Divorce” includes all the new tax laws. Please email TheNextChapter@bdfllc.com if you would like a complimentary copy to give to someone who is contemplating divorce to help them through the process with least amount of cost, complexity and conflict as possible.
Important Disclosure: No representation is being made that any strategy shown will or is likely to achieve results similar to those shown in this presentation. BDF does not provide legal, tax, insurance, social security or accounting advice. Clients of BDF should obtain their own independent tax, insurance and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning. BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.
A wealth manager and owner at BDF, Heather L. Locus, CPA, CFP®, CDFA® founded our Women’s Service Team and leads our Divorce Practice Group. She loves solving complex problems by balancing the financial and emotional components with tax and legal issues. She has been named one of America’s Top Women Advisors by Forbes and was named a Top 200 Wealth Advisor Mom by Working Mother. In 2017, she authored The Next Chapter: A Practical Roadmap for Navigating Through, and Beyond, Divorce.