Planning for divorce amid changing tax laws

People in Oklahoma who decide to end their marriages may seriously consider how changes to the tax laws will affect their divorce. In late 2017, Congress passed the Tax Cuts and Jobs Act, best known for its changes to income and corporate taxes. One provision affecting divorcing couples will go into effect with the new year. Many couples escalated their divorce timeline in order to finalize a settlement before the end of the year. While the new rules will apply to all divorces finalized on or after Jan. 1, 2019, they will not affect people who completed their separation in 2019 or earlier.

For decades, alimony has been treated consistently under federal tax law. The payer of spousal support can deduct the payments from his or her gross income, resulting in substantial tax savings for a wealthy person. In addition, the recipient would pay taxes on the funds as part of his or her income, typically in a lower tax bracket. As a result of the overall tax savings afforded by this option, wealthy spouses had a significant incentive to agree to generous spousal support payments as part of the divorce settlement.

The new tax law changes this approach. Instead, the payer will no longer receive a tax deduction for alimony payments. The recipient will also receive the funds tax-free. While this may seem to be a windfall for recipients, divorce lawyers caution that it is likely to make negotiations more difficult and reduce the overall amount of alimony paid.

The financial aspects of divorce can be some of the most difficult, leading to long-term effects that persist after other issues are resolved. A family law attorney might be able to help people to understand the changing laws and work to achieve a fair settlement on critical issues, including spousal support and property division.