Divorce lawyers have been overwhelmed by clients hoping to finalize their divorces by December 31, 2018, and with good reason. If you’re divorcing in 2019, you’re facing a different set of laws than those who chose to end their marriages in previous years.
The Tax Cuts and Jobs Act (“TCJA”), signed into law by President Donald J. Trump on December 22, 2017, presents major changes significantly impacting women and men going through a divorce.
The previous tax law regarding divorce was in existence for more than three-quarters of a century, and was created with the idea of additional monies for divorcing couples to ease the difference between joint and separate tax filings.
The recent changes are causing issues for divorcing couples who are already dealing with serious financial issues.
The new law should raise more than $6.9 billion for the government over the next ten years, but that means divorced people will have less money.
No More Spousal Support Payment Deductions
One significant change in the TCJA concerns spousal support payments ("alimony" in the new law) and deductions. Previously, spouses paying spousal support could deduct their payments on their tax returns, and those receiving spousal support were required to include payments in their taxable income. That’s no longer the case.
Those paying spousal support can no longer deduct it, while for those receiving it, it’s almost tax-free income. In high tax states, the loss of that deduction is expected to cost high earners about 50 percent in taxes. In 2016, roughly 586,000 taxpayers claimed the spousal support deduction, and of those, approximately 164,000 were for those whose income ranged between $100,000 and $200,000.
The New York Times reports that about 20 percent of those currently claiming the spousal support deduction are among the top five percent income earners as measured by household income.
No More IRA Contributions
Under the previous tax law, the spouse receiving spousal support – the majority of whom are female – could use the taxable income to contribute to an IRA if they were not employed.
Since the income is no longer taxable, this is no longer an option. A spouse without a retirement plan is in greater danger of ending up in poverty in old age.
More Fighting Expected
It’s likely the tax changes will make an already difficult situation more acrimonious for divorcing couples. First, there’s less incentive for the higher-earning spouse to agree to pay spousal support, so the financial details of a divorce will probably become messier.
The person paying spousal support receives more leverage under the new law, since it is now in their interest to keep spousal support payments as low as possible because of the lack of deductibility.
Since child support payments are often calculated based on spousal support payments, that’s another area in which complications will ensue. The more a couple fights about divorce issues, the higher the legal fees and overall costs of the split.
That also means it will take longer to settle, with a greater emotional toll on the spouses and their children. Divorce is never easy, but the provisions of the TCJA just made it a lot harder on many levels.