How the Tax Laws for Divorce Will Turn Upside Down in 2019
The 4 key changes and how splitting couples should plan for them
Nobody ever said going through divorce is easy. Aside from the normal emotions of a broken relationship and family, there’s the paperwork, the attorneys, the courts and, of course, the money. As if dividing up assets wasn’t difficult enough, new tax changes taking effect in January 2019 could add a significant amount of stress to divorces after this year.
Here’s what you need to know if you think you might divorce in 2019 or beyond:
4 Coming Tax Changes Regarding Divorce
There are our key tax changes regarding divorce starting in 2019.
1. Alimony paid will no longer be tax-deductible and alimony received will no longer be taxable income. For decades, alimony — typically paid by men — has been tax deductible for the person paying it and taxable income for the person receiving it (typically women). But that basic tenet of divorce will no longer apply next year and beyond, due to provisions in the big 2017 tax law.
This could make the process of divorcing extra sticky, overly emotional and significantly uglier. The law change stands to be the biggest dividing issue in divorces in 2019 and, by some estimates, will raise $6.9 billion for the government over next 10 years.
As a result of the new tax treatment, high-income divorcing spouses will aggressively fight to pay less in alimony, since the government will no longer subsidize these payments via the tax deduction. (This could hurt finances for some women, whose income typically falls sharply after a divorce.) Lower-income spouses will likely fight to get as much alimony as possible, since the tax burden will be removed and the payments will go further.
Calculations by Boston University economics professor Laurence Kotlikoff in the Analyze My Divorce Settlement estimator from his company, Economic Security Planning ($99 per year for individuals), have found that the new tax law will likely result in smaller alimony payments.
Incidentally, legal fees paid to attorneys helping secure alimony will no longer be tax deductible in 2019 or after.
You’ll need to have a signed agreement before December 31, 2018 in order to continue to play by the traditional tax rules for alimony.
2. People who are already divorced will be grandfathered in, but if their agreements are modified in 2019 or beyond, they could be subject to the new rules, too.. If the modification states that it is to be governed by the new rules, then the new rules will apply. If the modification says nothing, however, the old rules will apply.
Consequently, people should be extremely cautious when modifying divorce agreements in 2019 and beyond.
3. Pre- and post-nuptial agreements may be affected by the tax changes, too. The new rules may nullify many of the items in such agreements, so all pre- and post-nuptial agreements should be reviewed by a financial consultant, an attorney or both.
Don’t get caught flat-footed and re-negotiate terms if necessary.
4. One more thing couples divorcing in 2019 or after should keep in mind: Children won’t be the tax deduction they used to be. The 2017 tax law eliminated the $4,050 exemption for each dependent, through 2025. The child tax credit (which offsets taxes owed, dollar for dollar), however, has doubled from $1,000 to $2,000.
Remember, too, that the standard deduction has almost doubled because of the 2017 tax law. Single taxpayers in 2019 will see a standard deduction of $12,000; it was $6,350 in 2017.
3 Tips on Divorce and Taxes for 2019
If you’ll be going through a divorce in the new year, here are some things you will want to think about:
Know the good from the bad. With the new laws, you, your spouse, both attorneys and any financial adviser the two of you will use should be looking at all the angles. Alimony might be the headline here, but it is far from the only asset involved in a divorce.
Know the good assets from the bad assets, tax-wise.
If you are the higher-income spouse, consider giving an Individual Retirement Account (IRA) to the lower income spouse, if applicable, because that shifts the tax burden to the receiver when that IRA is accessed. If you’re the lower-income spouse, know that you would inherit that burden.
Both parties should carefully consider their total tax equations and find the best overall comprehensive way to benefit financially over the short- and long-term.
Slow your roll. Don’t be among the first guinea pigs to file for divorce in the new economics of divorce next year. As attorneys and financial advisers navigate the new world, they will discover patterns, learn new angles and tricks and be better prepared to position you for financial success in your divorce.
Take your lumps. You might consider taking (or giving) a lump sum divorce payment instead of monthly payouts in order to invest, pay for home repairs, or simply to be able to move on quickly.
Every financial situation is unique, so if receiving one large payment annually enables you to responsibly strengthen your fiscal situation, give it serious thought.
In a divorce, finances can lead to difficult processes and hard feelings. So as the new tax laws complicate the rules for couples in 2019, financial advisers and attorneys will need to help them navigate the new terrain together, looking for the best equations and answers.