Based on recent legislation from President Trump, the tax laws for divorce are changing. Those who divorce beginning in the year 2019 will see some significant tax disadvantages based on previous years.
The end of 2018 actually yielded a higher-than-average number of divorces thanks to these changes that will hurt divorcees. Attorneys and judges reported a significant increase (20 percent) in the number of divorces toward the end of the year, thanks to these new tax laws that will penalize those divorcing from here on out.
If you didn’t get divorced in 2018, you’ll be facing different tax implications than in years previous. Megan Gorman, managing partner at a San Francisco financial management firm says it will all be okay, however.
“[It’s] not the end of the world,” she told CNBC. “What it does is give us opportunities to do planning on other areas of your finances if you’re getting divorced.”
Knowledge is power when it comes to divorces. Research all you can into the divorce process, good attorneys, and tips to help you through it all. When it comes to financial tax repercussions, here’s what you need to know.
Alimony No Longer Tax Deductible
In past years, alimony paid by one spouse has been deductible from taxes or the person paying it. Those receiving it could also deduct it from their taxes. However, as director of the H&R Block Tax Institute, Gil Charney, stated, “The government decided to get out of the alimony business.” As such, they are no longer allowing tax deductions on divorces starting in 2019.
As a result, it’s expected that divorces will become messier and more aggressive. “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,” says Dean Hedecker of NextAvenue, indicating that women will probably be the most aggressive fighters since their income typically takes the biggest hit in 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,” he explains, indicating a potential increase in alimony payments starting in 2019. Legal fees paid to attorneys will also be higher, even though these are no longer tax deductible starting in the new year.
This rule does not apply if you are already divorced, however. Your tax-deductible alimony payments will be grandfathered into the system and won’t be subjected to the new rules. Your alimony will be tax deductible if you were divorced prior to 2019. However, modifications made to alimony in 2019 could result in tax penalties.
Child Tax Deductions Are Changing
Each dependent through the year 2025 will equal a $4,050 deduction. However, the same 2017 law that is changing divorce now will also eliminate that deduction. But, to help make up for some of the loss, the child tax credit has doubled from $1,000 to $2,000 per child.
Additionally, single taxpayers will receive a higher standard deduction of $12,000, nearly double what it was in 2017. This makes it somewhat easier for newly divorced individuals to keep up with financial expectations.
Pre/Post Nuptial Agreements Are Changing
Those who have made pre and post nuptials will want to consult an attorney and/or financial consultant right away to understand the changes that are occurring to their agreements. These new tax rules may indicate a few significant changes to your agreements and may call for an increase in renegotiations over the next few years.
Changes May Influence Marital Decisions
Experts predict that marital decisions will change drastically in the coming years, thanks to divorce tax laws.
“The research indicates that tax policy does influence decisions about getting married and staying married, but this influence is modest,” Brad Wilcox, director of the National Marriage Project and sociology professor at the University of Virginia told CBSNews. “Changes in tax-related alimony deductions are not likely to have a huge impact on either the timing or likelihood of divorce for married couples in America.”