Want a Divorce? Then do it before December 31 or pay a much bigger tax bill

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Article from Accounting today worth reading. The income tax changes related to alimony go into effect on 1/1/2019. Since the Payor will be paying the tax on any alimony paid, the result is that more of the money will be going to the IRS rather than the new divided family.

Note that the divorce does not need to be completed by 12/31/18 but a written agreement defining the maintenance agreement needs to be signed pursuant to the divorce or legal separation by 12/31.

Click here to read the article.

Clarification from the IRS

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I keep hearing from attorneys, accountants and clients that there is still confusion about whether you have to have your decree of dissolution entered by the Court before the end of 2018 to have taxable maintenance. I checked with the IRS and they confirmed that the rule is the same as it has been, namely:

“For any divorce or separation instrument executed after December 31, 2018, alimony payments will no longer be deductible or includible in income. For divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) executed before December 31, 2018, this change would only apply if the divorce or separation instrument was modified after 12/31/18 and the modification expressly provides that the amendments made by Act sec. 11051 apply to such modification.”

So, as long as you have executed a written separation agreement before the end of the year, you can take advantage of the current tax law which provides for treating alimony as a taxable transfer, thus potentially saving the combined family some tax money.

If you are planning a divorce, best to get the deal done in 2018

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As described in my previous post, the tax law passed in 2017 changed the way alimony is treated for tax purposes starting in 2019. In short, compared to the current tax law, the new tax law will result in more of the combined income of the divorced parties going to pay taxes if alimony is being paid.

For all alimony agreements finalized on or before December 31, 2018, the current tax law will apply. The person paying the alimony (AKA maintenance or spousal support) will get to deduct from their gross income the amount of alimony paid, while the recipient will have to pay taxes on the alimony received.

For all new agreements finalized after December 31, 2018, the payor will NOT be able to deduct alimony from their income for tax purposes, and the recipient will not have to pay tax on the alimony their receive.

Why does this mean there will be less money for the two households? Because if the payor is paying tax on the alimony at a higher tax rate than they would have been, then there will be less net income to distribute.

The formula that the Colorado Courts have been using for the past few years as an indicative amount of maintenance to consider when making maintenance awards has been changed to reduce the amount of maintenance by 20% to take into account the change in tax law.

GOP Tax Proposal eliminates alimony exclusion starting 2019

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The new tax bill eliminates the alimony exclusion for the payor of alimony with new or amended agreements after December 31, 2018.

Why does this matter?

For years, alimony paid was subtracted from the payor’s gross income, and was taxable to the recipient. More most families this lowered the tax bracket for the higher earner, and increased it for the lower earner. This had the impact in most cases of the parties combined federal tax being lower, and thus more after-tax income available for the needs of the family.

The new law treats alimony like child support: the payor pays the tax and the recipient pays no tax.

Particularly for families where the higher earner’s income is significantly higher than the lower earner’s income, if divorce is being considered in the short term, you may want to get the divorce finalized in 2018 to maximize the after-tax income available to the family.

Think before you speak…

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what to sayDivorce is hard. So hard that we often forget that our words are powerful and can shape the outcome in an unintended way. Often we are hurt, angry or grieving, and it is difficult for us not to be hurtful when we speak to our spouse during the divorce process. I have found that it is helpful to remember this saying, and to meditate on it for a bit before we speak. We will often have a better outcome overall if we do this.

It is from the book “The Healing Garden: A Place of Peace” by Gwen Nyhus Stewart. The quote: “Eknath Easwarden wrote, “The Sufis advise us to speak only after our words have managed to pass through three gates. At the first gate, we ask ourselves, Are these words true? If so, we let them pass on; if not, back they go. At the second gate we ask, Are they necessary? If so, we let them pass on; if not, back thy go. At the third gate, we ask, Are they kind? If so, we let them pass on. If not, back they go.”

The Dalai Lama says, “My religion is very simple. My religion is kindness.”