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New tax law ushers in alimony changes

On Behalf of | Jul 23, 2018 | Divorce, Firm News

Tax laws and other financial matters have always had a significant impact on how Massachusetts couples divorce. Now, with the Tax Cuts and Jobs Act of 2017, divorce planning is sure to go through significant changes to match the radical difference in how spousal support payments will be handled. The changes will go into effect with the new year in 2019, but they will only affect people who finalize their divorces in 2019 or later. Some couples are hurrying to finalize their divorces on or before December 31, 2018 in order to preserve the current tax treatment.

The impact of the changes will be especially significant for wealthy couples with substantial incomes and high-asset divorces. Under current tax law, people who pay alimony to their former spouses can deduct the amount of these payments from their taxes. For people with high incomes, the tax savings can be substantial. In addition, the recipient of alimony pays taxes on the income under current law. Because the recipient typically falls in a lower tax bracket, this leads to a lower tax payment and a higher amount of spousal support.

The new tax law will reverse the treatment of alimony. The payer will no longer be allowed to deduct alimony payments, cutting off a major source of tax savings. In addition, the recipient will receive the funds tax-free. However, what may seem to be a boon to the recipient is unlikely to be so in practice, as the overall amount of payments could decrease significantly.

These changes are likely to push divorcing couples to seek additional means of distributing wealth during a divorce settlement in order to avoid this negative tax treatment. A family law attorney may be able to work with a divorcing spouse to protect their interests and to seek a fair settlement on financial matters, including property division and spousal support.