If you are interested in filing for divorce this year, you must consider the new tax laws which are now fully enacted.
Signed into law on December 2017, the Tax Cuts and Jobs Act reverses the divorce law which was introduced nearly a century ago in order provide more money for divorcing couples and make the transition from paying taxes jointly to separately much easier. This new law is designed to raise an extra $6.9 billion over the next ten years for the federal government—which means less money for those going through a divorce.
The following are the major changes to divorce starting in 2019:
- Alimony is no longer tax deductible for the paying spouse, and the receiving spouse will not pay tax on it – Alimony was tax deductible for the individual paying it and taxable income for the receiving spouse for decades. The tax deduction on spousal support was considered an incentive to allow the higher-earning spouse to provide more alimony to the lower-earning spouse, which means fewer taxes paid and more money for the family. Since these payments are no longer tax deductible, higher-earning spouses will do their best to pay less alimony, while the lower-earning spouse will fight for as much spousal maintenance as possible. Furthermore, legal fees paid to lawyers for helping obtain alimony are no longer tax deductible as well.
- Already divorced couples will have their agreements grandfathered in – For those who were able to finalize their divorces before the new year, the old rules will still apply. However, if you decide to modify your agreement, any changes could be subject to the new rules.
- The new tax changes impact prenuptial and postnuptial agreements – Since most prenuptial and postnuptial agreements consider alimony to be tax deductible, you may need to review such agreements with a lawyer or financial consultant to factor in the new tax changes.
- The new tax changes also apply to child tax exemptions – The Tax Cuts and Jobs Act got rid of the $4,050 exemption for each dependent child through 2025. However, the child tax credit doubled—by increasing it to $2,000 compared to $1,000. Keep in mind, the standard deduction has nearly doubled as well.
Due to the new laws, you and your spouse must meet with your lawyers and any financial advisors to determine how will they affect your pending divorce.