How will the new tax reform law impact divorce? While most of the focus has been on the lowering of the tax rate for corporations, the new law will also have a significant impact on divorces as of January 1, 2019. The most notable of those changes concerns alimony.
Previously, spouses paying alimony could declare those payments as a deduction. Conversely, spouses receiving alimony had to declare it as income. The new law takes both of those things away and that will influence how some divorce settlements are negotiated, particularly collaborative divorces and mediation.
In litigation, child support and alimony follow a formula without any room for negotiation. One of the many things that make collaborative divorce and divorce mediation an attractive option is that there can be some flexibility with alimony.
For example, let’s say a spouse is paying child support and alimony. Perhaps under the previous set of rules, the alimony payment pushed the ex receiving the alimony into a higher tax bracket. So, even though he/she was receiving the alimony payment, it was costing him/her money. As part of the negotiation, we could increase the child support payments, which are not considered income, so that the spouse would remain in the same tax bracket.
This is but one example. It’s also not uncommon for a spouse to actually want to pay MORE alimony to take advantage of the deduction. Alas, as of January 1, 2019 that option will not exist. Alimony will remain deductible/income for divorces finalized prior to January 1, 2019.
What are some of the other impacts of the new tax reform law? There will certainly be an impact on owners of corporations going through divorce as the tax rate has been dramatically reduced. Similarly, the small business owner who filed as a sole proprietor now may opt to become an LLC or incorporate to take advantage of the new law and that may have to be factored into a divorce.
With many divorcing couples with children, the custodial parent will often desire to stay in the family home to mitigate the emotional impact of the divorce on the children. With the new tax law the deduction for the interest on the mortgage payments is now capped at $10,000. This might make staying in the family home less feasible financially for the custodial parent.
There are any number of other scenarios where the new law could have an impact on divorce settlements. The flexibility provided by divorce mediation and collaborative divorce is still a great benefit to divorcing couples as everyone tries to get their arms around the new law.
The new tax law shines a light on something that’s long been true of divorce mediation and collaborative divorce: the use of professionals. Specifically, I’m talking about CPAs and financial planners.
In litigation, divorcing parties will hire their own attorneys and retain the services of an accountant or financial planner to review assets. As an expense-saving move, many divorcing couples will opt not to bring in one of these financial professionals. That cost-saving move can be extremely costly if you’re not fully aware of all your finances or financially savvy.
A CPA and/or a financial planner is typically part of the team of professionals involved in a collaborative divorce–with the cost split by both parties. In divorce mediation, it’s not uncommon for divorcing couples to do the same, again while splitting the fees. With the new tax law being so new to all of us—CPAs included—it simply makes sense to have a financial professional in your corner during your divorce. That’s why if you and your spouse can agree on a less adversarial approach, divorce mediation or collaborative divorce makes more sense than ever.