There are many current tax issues for divorcing couples, and a major new one concerns alimony (or spousal support). Thanks to recent changes in the federal tax code, those paying alimony could face higher tax bills, those receiving it could pay less in taxes, and both have a strong motive to recalculate what has been done routinely for 70 years or more.

Supposedly a way to stop subsidizing divorces, the tax deductibility of alimony payments will end on December 31, 2018.

Under existing law, only the recipient pays income taxes on the alimony. Starting in 2019, the party paying alimony will pay income tax on the amount being transferred it to the recipient, but the recipient need not count the alimony as taxable income. Typically, those paying alimony are better off financially than the recipients and often are in a higher tax bracket. If the recipient is the only one paying taxes, then less taxes are paid on the money, considered by some a tax subsidy for divorce.

This IRS Code change will result in massive consequences to the payors. The IRS estimates about 600,000 Americans claimed an alimony deduction on their 2015 tax returns, according to CNN. Given the loss of deductibility, there will be more reluctance by those paying alimony to agree to a settlement or the other spouse may need to agree to take less. With more taxes paid, there’s less money for the parties to split. The biggest impact of these increased taxes may be on middle and lower income divorcing couples, those least able to afford higher taxes.

Those creating prenuptial and postnuptial agreements may have done so assuming the tax deduction would continue indefinitely. These agreements are a way for a couple to plan their financial rights and responsibilities towards each other if the marriage ends. If the tax deduction is particularly important to the party who would pay alimony under such an agreement, he or she may need to renegotiate what will be paid.

Another tax change will impact a smaller number of divorces, but could impact a number of people in the Princeton area where incomes and housing costs can be very high. Under the new tax code, the amount of mortgage interest that can be deducted from your taxes drops from the first $1.1 million of your mortgage to the first $500,000 and there will be no mortgage interest deduction on a second home.

If the parties are negotiating the fate of the family home or homes, this change may impact a party expecting to continue to pay a very large mortgage or a party who may need to refinance a home after an ex-spouse is removed from the deed.

While we are not CPA’s or tax attorneys — professionals who are or may be specialists in taxation, including divorce taxation — we regularly work with those professionals to come up with a detailed, accurate, fair plan for the divorcing couple, as part of a mediation, arbitration, collaborative law, or litigation approach to dispute resolution.

If you are considering a divorce and have questions about the financial and tax implications of ending a marriage, contact our office for a near-term and reduced fee initial consultation.  We can talk about your marriage, finances, assets, and debts, and discuss how equitable distribution of those assets may play out as well as what may be a reasonable alimony settlement or award in your case. We will listen to your facts, discuss the law, and together we will develop a plan that is just right for you.  Call now. You will be glad you did.