How Changes to the Tax Laws Can Affect Your Divorce Settlement
As part of the 2017 “Tax Cuts and Jobs Act,” alimony is no longer deductible by the payor, nor is it included as taxable income to the recipient. This change applies to divorces finalized after 12/31/2018.
Going forward, an alimony award providing monthly support will be paid using after-tax dollars.
Without the old tax advantage of paying alimony with pre-tax dollars, parties are increasingly resorting to monthly payments of property division rather than alimony. And while this might seem like a small matter of semantics, it can have far-reaching financial consequences.
For example, let’s say you’re negotiating a divorce settlement , and your soon-to-be ex-spouse proposes paying you monthly support. It’s crucial that you understand the impact of how this monthly support is defined in your divorce agreement.
If you’re receiving monthly support payments that are clearly defined as alimony, this affords you certain protections that you wouldn’t have if the monthly support is considered part of the agreed-upon property division.
If you’re receiving monthly support payments, but they’re considered property division, and your ex-spouse files for bankruptcy, your support payments could be discharged. In other words, they could simply go away with the stroke of a pen during a bankruptcy case. Alimony, on the other hand, is not dischargeable via bankruptcy.
Also, if the monthly support payments you’re receiving are classified as property division and your ex-spouse stops making payments, less of your ex’s net pay can be garnished to compensate you. With alimony, net pay garnishment can be as much as 50%, but with property division, garnishment is usually no more than 25%.
But there are circumstances where property division payments might be preferred over alimony payments. Unlike alimony, property division payments cannot be modified or terminated by the usual alimony termination provisions, such as death, remarriage of the recipient spouse, or a live-in-lover statute. Property division is a fixed debt, owed in full despite subsequent events.
And it is often a prudent decision to have a tax expert along with a divorce financial planner on your “team.” You might also need the help of an experienced therapist to help you deal with the emotional and psychological aspects of the divorce process.
And when it comes to the financial components of your divorce settlement, your professional team members can help educate you on the impact of issues like making or accepting periodic support payments and whether they’re considered property division or alimony.