How will the new tax law impact divorce?
The new tax law will impact divorce negotiations. Here is a brief review.
The Tax Cuts and Jobs Act (TCJA) led to many changes to the tax law. One specific change that will have a direct impact on divorce involves the change to alimony.
Is alimony allowed in Arizona? Arizona state law allows for the use of alimony or maintenance payments following a divorce. A court will either approve a proposed maintenance plan presented by a divorcing couple or order a maintenance plan. When ordered by the court, the maintenance order is based on a number of factors. These factors can include the duration of marriage, standard of living during the marriage, comparative financial resources of each spouse and the contributions of one spouse to the other’s earning capacity. This can include instances when one spouse took over household duties to encourage the other to pursue higher levels of education, such as medical training.
In most cases, the court awards either rehabilitative or temporary spousal maintenance. It Is not common to receive a permanent maintenance award.
How do taxes impact alimony awards? The government taxes alimony. Generally, the party making the alimony payment gets a tax deduction while the party receiving the payment must account for the funds as income on his or her tax return. The Internal Revenue Service (IRS) has followed this rule in the past and will through 2018.
The rule will change for divorces completed 2019 or later. The TCJA has removed the tax deduction. The payor will no longer take the deduction and the payee will no longer report the alimony payment as income to the IRS. The change is not retroactive. As such, divorces completed before 2019 will abide by the prior rule.
Are there other tax considerations to keep in mind during divorce? Alimony is only one of many tax considerations to keep in mind during divorce negotiations. The divorcing couple should also consider each party’s filing status. A married status may be appropriate until a final decree of divorce was received. The agency also holds each party jointly and individually responsible for tax obligations due on joint returns for the tax year preceding the divorce.
Those who have children will also need to discuss which parent will claim the child or children as a dependent or dependents on his or her returns.
These are just a few of the tax considerations to keep in mind when navigating a divorce proceeding. An attorney experienced in these matters can help to ensure these and all other applicable considerations are taken into account during the divorce.