A Potential Tax Move For 2018 Divorce

As the commercial says “I’m not a tax advisor and I didn’t stay at a Holiday Inn Express last night…” but a piece by Dan Caplinger from The Motley Fool might have a useful idea for your situation. There’s a link at the end to the whole article.

Tax strategies is something that PeaceTalks always has addressed by at least one, if not more, professionals in all of mediation cases to ensure that both parties are able to optimize their assets after the settlement is reached.

There’s one big change that won’t hit taxpayers until the beginning of 2019. It won’t affect everyone, but for the many people in the U.S. who are divorced, changes in how alimony payments get taxed could have a huge financial impact, given the roughly $10 billion in such payments that get made every year. With divorces running between roughly 800,000 and 950,000 annually since 2000, there are millions of people who might be able to benefit from some last-minute tax planning — if they can cooperate effectively.

What the tax law did was to change this treatment starting in 2019. For those who get divorced in 2019 or later, all payments between divorced spouses will be treated identically. There’ll be no tax impact from any payment, meaning that the receiving spouse won’t have to include payments as income, and the paying spouse won’t get to deduct anything. That’s a whole lot simpler, and it solves some potential fraud issues. But it does remove a planning opportunity for divorced spouses who are willing to work with each other.

In particular, there are two situations in which it’ll be important for couples to act before the end of 2018. First, if you’re in the process of divorcing, the timing of the final divorce agreement will be crucial. Specify alimony payments and get divorced on or before Dec. 31, and you’ll have the option to effectively transfer taxable income from a spouse in a higher tax bracket to one in a lower tax bracket, saving on taxes overall. That in turn can make it possible for the paying spouse to make larger payments while still ending up ahead on an after-tax basis. On the other hand, if you wait until Jan. 1 to get divorced, that option won’t be available any longer.

Second, if you’re already divorced but the original agreement didn’t include an order for spousal support, the law is ambiguous about how a subsequent order would get treated. Those who already have a spousal support order by the end of 2018 can retain the current-law tax treatment even if that order is modified in or after 2019. But there’s at least some risk that a request for a first-time spousal support order would be treated as first having occurred in 2019 or later, taking away the option of having old-law tax treatment.

Finally, the new law does give divorced spouses who would prefer the new tax treatment to govern their pre-2019 divorce the option of agreeing to adopt the new rules. That’s not necessarily a time-critical issue, as this election can be made at any time. But if circumstances have changed and it makes sense to treat payments between divorced spouses as having no tax impact, it may be that the sooner you do so, the better.

As always, if you or a friend is in danger of missing the December 31st deadline, call the office and we’ll see if we have any available resources in our network that might help.

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