New Tax Law Brings Changes to How Divorces are Negotiated

 On December 22, 2017, President Trump signed into law The 2017 Tax Cut and Job Act of 2017.  Among the many controversial changes this new law will make, will be how divorce settlements are negotiated. 

A 75-year-old tax law had allowed the payor of alimony (now knowns as spousal support) to obtain a tax deduction for the amount of spousal support paid.  The spouse receiving the spousal support paid income taxes on spousal support received.

Under the new law, the situation is reversed.  Now the payor of spousal support no longer receives a tax deduction, and it is the spouse receiving spousal support that pay the income taxes.  Since spousal support is virtually always paid by the spouse with the higher income, and in a higher income bracket, under the old law, the government received less money in income taxes.  The new law reverses that, and now the government gets more taxes. 

Under the old tax law, the fact that spousal support payments were deductible to the party paying spousal support often resulted in the spouse with less income receiving more generous amounts of spousal support.  Under the new law, the amount of spousal support paid may be reduced.  At the very least, it probably will mean that divorce negotiations will become more difficult.  This may result in longer divorce settlements and higher attorney fees.

This new rule won’t go into effect until the end of 2018, and won’t apply to those already paying spousal support under the old rule. Also, the new rule won’t apply to pre-nuptial agreements, post-nuptial agreements, and divorce stipulations signed before January 1, 2019.  However, these agreements must state that they are following the old rule concerning who pays the taxes on spousal support.  I expect that this may cause those negotiating a divorce settlement during 2018 to rush to reach a settlement before the end of the year.

Since the wealthy and corporations are getting the vast benefits of this tax cut, the divorcing couple’s increased taxes will go to support those parties. The new tax law will also cause the deficit to increase by about 1.5 trillion dollars over the next 10 years.  It is also expected that that President Trump and the Republicans will argue that programs such as Medicare and Social Security should be cut due to the projected decrease in taxes coming in.   I hope that voters will remember this in November.  We will see…