How Tax Reform Changed Divorce
Divorce has long been a stressful and contentious process, which is why it is so important for any person who is going through a divorce to be represented by an attorney. Dallas divorce lawyers help clients to try to facilitate divorce agreements through effective compromise to try to avoid litigation. Attorneys can also provide assistance to clients who are involved in a litigated divorce and who want to maximize the chances of a favorable outcome.
As difficult as divorce has always been for couples, however, CNBC indicates that the divorce process may actually become more acrimonious and even more difficult for couples who have decided to separate. These undesirable changes to the divorce process may occur as a result of changes to the tax code that occurred thanks to tax reform.
Why Divorce Could Become More Difficult
According to CNBC, tax reform may change a long-standing divorce rule that has applied throughout the United States for at least the last 75 years. That rule relates to how alimony is taxed.
Alimony has always been tax deductible for the person who pays it, and it counts as income for the person who receives it. Now, however, the Tax Cuts and Jobs Act has changed this long-standing rule. If a couple gets divorced after December 31, 2018, alimony is not going to be deductible any more for the person who is paying it. The person who is receiving the alimony payments, in turn, will not be taxed and will receive that income tax free.
This could upend current guidelines, calculators, and software programs that are currently in use to determine alimony payments because all of this software is built around the premise that alimony will be tax deductible for the payor and taxable for the recipient.
The change could also cause some families financial hardship. As CNBC indicated, the founder of an alimony reform advocacy group indicated that it is already more expensive for divorced couples to maintain two separate households than when a couple is married and maintains a single household. The alimony deduction helps to ameliorate some of this burden since the higher-earning spouse who had to pay alimony would receive tax relief by being able to deduct alimony paid. The lower earning spouse who received the alimony would be taxed at a lower rate.
This tax break not only helped to relieve some of the financial burden created by maintaining separate households, but it was also a useful tool when alimony was being negotiated that has now been eliminated because of the change to the rules on alimony. This could make divorce less affordable.
Finally, because the new rules do not go into effect until a couple divorces after December 31, 2018, many are concerned that this could prompt a lower-earning spouse who will be receiving alimony to try to drag out the divorce process as long as possible so he or she could get tax-free alimony income. This could serve to create more conflict during divorces.
Couples who are ending their marriage need to understand the impact of tax reform on alimony in their particular situation. Dallas divorce lawyers can provide help to couples with all issue related to alimony, property division, and more.