Now that the Tax Cuts and Jobs Act (TCJA) has been signed into law, we can start to examine its impact on family law attorneys and their divorce clients.
As a result of the sweeping tax reform, family law attorneys will need to reconsider the financial strategies they use for their divorce clients.
Repeal of the Tax Deductibility of Alimony
Under the new tax law, for any divorce or separation agreement signed after December 31, 2018, spousal support payments are not deductible by the payor spouse and are not included in the income of the recipient spouse. As we reported in our earlier blog post, the initial House bill proposed that the change go into effect one year earlier. The new tax law will dramatically impact a pillar of divorce across the United States: the tax deductibility of alimony.
Another change from the initial House bill is that the signed law will not affect the tax deductibility of any divorce or separation agreement executed on or before December 31, 2018 and modified after such date, unless the modification expressly provides that the new amendments under Section 11051 apply. In essence, tax deductible alimony is “grandfathered in” for all couples divorced before 2019.
The basic impact of the loss of the alimony deduction is fairly easy to forecast:
Spouses receiving alimony will be asked to accept less money than previously expected as the payments are no longer subject to tax, and the cost of paying alimony will increase as it will be taxable to the paying spouse.
Since alimony is often a valuable tool in divorce negotiations, eliminating the tax deduction may limit the ability of attorneys and judges to find common ground in reaching a settlement.
Since the new law has shifted the tax burden to the paying spouse, who typically has a higher marginal tax rate, it might actually make alimony negotiations more difficult and contentious.
Attorneys and couples contemplating or undergoing divorce need to be aware of – and closely monitor future regulations – this change in the deductibility of alimony.
Higher Business Valuations Likely
In addition, as we discussed in an earlier blog post, TCJA might result in higher business values of closely-held companies, which often are one of the biggest assets in a marital estate.
Reconsider Your Financial Strategies for Divorcing Clients
Our team of litigation support professionals can help family law attorneys form financial strategies for their divorcing couples in light of the new tax law. Contact us online or call 800.899.4623.
