There are many tax issues facing divorcing couples, and a major one is alimony (or spousal support). Thanks to recent changes to the federal Tax Code, those paying alimony after 2018 will face higher tax bills. For divorce settlement agreements or judicial decrees entered before December 31, 2018, the parties will continue the “old” practice of the payor deducting alimony and the payee paying taxes on that alimony.

Starting in 2019, the party paying alimony will pay income tax on all income, including the alimony being paid, then transfer it to the recipient, but the recipient need not count the alimony as taxable income. Generally speaking, those paying alimony are better off financially than the recipient and often are in a higher tax bracket. Under the “old” rules, a recipient paid lower taxes on the money, which represented a tax subsidy for divorce.

This  Tax Code change will result in substantial consequences to the payor spouse. The IRS estimates about 600,000 Americans claimed an alimony deduction on their 2015 tax returns, according to CNN. Given the lost deduction, those paying alimony will balk at higher alimony payments, because it literally does not pay the payor to be generous. 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 divorced couples, those least able to afford higher taxes.

Those entering prenuptial and postnuptial agreements probably did so presuming the tax deduction rules would continue indefinitely. These agreements are a way for a couple to plan their financial rights and responsibilities towards each other, if the marriage later ends. If the tax deduction is particularly important to the party who would pay alimony under such agreements, then he or she should consider renegotiating the deal.  An unreviewed prenuptial or postnuptial agreement could be unfair to the payor based on the recent tax law changes.

Another tax change will impact a smaller number of divorces, but could disproportionately affect Central Jersey residents whose 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 goes 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(s), 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.

If you are considering a divorce and have questions about the financial implications of ending a marriage, contact our office for a reduced rate initial consultation with one of our experienced family law attorneys.  We will discuss your marriage, your finances, how equitable distribution may play out, as well as what reasonable alimony could look like in your situation.  Call today.  You will be glad you did.