Managing divorce with new tax rules in mind

Starting at the beginning of 2019, couples filing for divorce in Pennsylvania and throughout the rest of the United States will have to do so with tax rule changes in mind, particularly if spousal support will be involved. This is happening because the Tax Cuts and Jobs Act (TCJA) changes how alimony is handled for tax purposes. Under the new law, alimony will not be tax-deductible for the payor, and the recipient won’t be required to report it as taxable income.

If divorce proceedings were started at the end of 2018, it’s likely already too late to beat the clock unless a final agreement or court order referencing alimony was already prepared or issued. Since mortgage interest deductions are currently capped at $750,000 instead of the previous $1 million, and local and state income taxes are now capped at $10,000, a divorcing spouse may also want to consider what tax advantages might be associated with ownership of the marital home.

Additionally, the child tax credit is up to $2,000 from the original $1,000, although it phases out at certain higher income levels. Still, the added value of the credit may make seeking custody of children more appealing than opting for joint custody. Couples may also want to consider alternatives to alimony, such as a one-time payment or payments for property division. However, the latter option has its drawbacks. If an ex-spouse files for property division payments may stop. Also, wage garnishment is done at a lower percentage with property division than what’s normally done for back alimony collections should non-payment occur.

The way divorce will be handled going forward will depend, in part, on how civil separating spouses can be with one another. This is especially true if there is a desire by a higher-earning spouse to make a one-time payment instead of alimony to offset their tax losses. In addition to working with a lawyer, some couples may benefit from insights provided by a neutral financial planner. In some situations, an attorney might be able to negotiate alimony or property division payment terms in a way that’s financially acceptable for both parties.


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