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How Do New Tax Laws Affect Divorce?

If you are not living under a rock, you have seen the new US tax bill and may ask how it will affect your divorce.  Contact an attorney or tax professional before making any decisions.

The most major impact was anticipated to be relative to taxation and deductibility of spoual support, also know as maintenance or alimony.  For the foreseeable past, unless otherwise agreed upon between the parties in their Settlement Agreement, all alimony was tax deductible to the payor and taxable as income to the receiving party.

The new 2018 tax bill had originally intended to change that, making payments non-deductible and non-taxable.  

How does this change things?  Let us take an example of a high earner making $500,000/year and paying $100,000/year in spousal support to his ex-wife.  If she earns no other income, she'd be paying an approximate tax rate of about 25% on her $100k.  The payor would be deducting the $100,000 from his income.  If he claimed that $100k, he'd be taxed at nearly 40%.  This results in a net loss to the Govermnment of 15%, or $15,000.  Essentially, by proper planning and with use of good attorneys and financial advisors, the parties have "created" $15,000 of cash.  With the proposed change, the husband would not have been able to deduct the alimony, resulting in a loss of $40,000.  (While few feel sorry for him, it is not unsubstantial).

The second proposal said that if you get an agreement signed in 2017, it remains tax deductible.  That nearly passed, but the final version allows for deductibility of alimony if an Agreement is signed before the end of 2018. Congress may have saved a lot of legal malpractice lawsuits as many divorcing clients were clammoring to get a deal done in a short, 2 week, window.  

If you are getting a divorce, talk to your attorney and tax professional about the tax implications of (1) alimony; (2) other support; (3) division of assets and debts; (4) carry over losses; and (5) capital gains.  There may also be advantages to taking money from a retirement/401k in one particular tax year.  

If you have questions or need legal counsel in Northern Kentucky for your divorce, call Attorney Michael Bouldin at 581-MIKE; 859-581-6453 or email mike@bouldinlawfirm.com .

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