How Will the New Tax Code Affect Family Law?
The Trump Administration Tax Cuts and Jobs Act is set to take full effect on January 1, 2019. With this new law, many provisions are expected to affect family law cases in the future.
It is for this reason that it is important that clients understand the law so that they can make an educated decision on whether they should file quickly before the January 1st date or wait until the new law goes into effect before filing.
The Tax Cuts and Jobs Act
The new law changes the previous law that allowed American taxpayers to deduct alimony from their taxes. This change will affect over 600,000 individuals who currently claim this alimony deduction in their taxes.
Currently, the law allows the spouse who pays spousal support to take the deduction while the receiving spouse is taxed according to the individual income bracket for him or her, including the spousal support received. The receiving spouse, under the new tax law, will not be taxed on the spousal support received.
The new law will only apply to divorces that are finalized after December 31, 2018. Even if the divorce is filed before the end of 2018, so long as the divorce order is signed after 2019, the order will be affected by the change.
The spousal support or alimony deduction has been in existence for decades and has been used almost as an “incentive” for spouses who were high-earners who wanted to take advantage of the tax benefits that came along with the law.
Factors to Consider in Finalizing Divorce in 2018
Many different factors play into whether a divorcing couple will want to finalize their divorce before the end of the year or wait.
One of these factors involves the question of whether spousal support or alimony is involved. If it is an order that will be included in the divorce, and the paying spouse wants to take advantage of the deduction, it may be wise to be sure the divorce is finalized before 2019 to preserve this deduction.
In addition, another part of the new law could affect the couple if they owned a family business. The new law benefits private businesses that are considered a pass-through business. In previous years, private businesses were valued from their cash flow and earnings. The new tax law could potentially increase the cash flow of the business depending on whether it is considered a pass-through entity.
The business will need to be assessed by a business valuation expert to properly determine the value of the business and make sure that it is given an appropriate value when assets are divided.
Possible Side Effects Expected
The tax benefits for spousal support was one of the main reasons why higher-earning spouses agreed to pay spousal support in the first place.
Not having this benefit there will potentially make divorces more contentious if one spouse makes more money than the other. If one spouse wants support, the other spouse is more likely to fight that request if he or she sees no benefit coming back to the paying spouse.
The chances of the case settling by one spouse agreeing to this type of provision are definitely slimmer than in past years, and it will be interesting to see how this plays out after the new year.
In addition, it will also have an effect on retirement and savings for the lower-earning spouse. To help a non-working spouse save for retirement, previous tax law allowed the non-working divorced spouse to contribute to an individual retirement account based on the spousal support they were receiving and paying taxes on. However, that will no longer be the case, and these spouses will also need to find other methods to save and plan for retirement.
Contact A Divorce Lawyer Today
To discuss how the new tax law will factor in your divorce, please contact family lawyers at Scott M. Brown and Associates. You can reach us by calling (979) 258-6813 or completing our online form. We have offices in Angleton, League City/Clear Lake, and Pearland.