Impact of New Tax Code on Texas Divorces

October 31, 2019 Posted in Divorce

When President Trump signed the Tax Cuts and Jobs Act (TCJA) on December 22, 2017, the federal government enacted many tax laws that impact divorcing couples, particularly those with high net worth.  Most important, the TCJA wipes out the 75-year-old tax deduction dealing with alimony payments.  The new law mandates that for divorces finalized after December 31, 2018, the spouse paying alimony will no longer be able to deduct those payments from his or her taxable income.  In addition, the recipient of alimony will no longer be required to pay taxes on the alimony payments.  The change in law shifts the tax burden to the higher earner.

Texas law only considers a demand for alimony (referred to in the law as “spousal maintenance”) under certain limited circumstances.  The spouse requesting support must show that they cannot afford to support their minimum reasonable needs.  In addition, one of two conditions must be met:  either the paying spouse was convicted of an act of family violence during the marriage or the pendency of the divorce; or the inability of the spouse seeking maintenance to earn sufficient income is either due to physical or mental disability or their responsibility to care for a child needing exceptional care, or if the marriage lasted 10 years or more.  That said, regardless of the circumstances, divorcing parents may agree to spousal support by contract.  Thus, the new tax law’s treatment of alimony will be a key consideration in negotiating divorce settlements in Texas as of January 1, 2019. 

Other concerns for those contemplating divorce in Texas include the impact of the TCJA on the use of 529 college savings plans and its impact on the valuation of a private businesses.

Impact of Tax Law on Use of 529 College Savings Plans

The new law allows 529 college savings plans to be used to pay for private schools, not just post-secondary schools or college.  This needs to be addressed in connection with any divorce settlement as it will be important to calculate how far these savings will go so you do not run out of money before your student even reaches college.  A fund to pay for college may need to be negotiated separately.     

How the New Tax Law Will Affect Business Valuation

Certain provisions in the new tax law relating to reduction of the corporate tax rate and the change in status of businesses with pass-through arrangements, such as partnerships, LLCs, S corporations, and sole proprietorships, have the potential to increase the value of a business.  As the valuation of a private business as a marital asset is frequently one of the most bitterly contested aspects of a divorce, an understanding of the impact of the TCJA is critical. 

Other Aspects of Divorce Affected by New Tax Law

  • Personal exemptions have been suspended for the tax years 2018-2015.
  • Deductibility of property taxes has been reduced.
  • Any other prior marital agreements (such as prenuptial and postnuptial contracts) will need to be re-examined in light of the new law.

Where to Get Help

If you have questions about how the new tax code impacts your divorce, contact a Dallas divorce attorney to discuss your case today.