New Tax Rules Make 2018 “The Year of the Divorce”

{4 minutes to read}  Breakin’ up is not just hard to do—it’s often expensive. But for the past 75 years or so, alimony has been deductible for the payor and income to the payee. This often helped soften the economic fallout of divorce by allowing the higher-earning spouse to pay alimony to the lower-earning spouse so the “family” could reduce its overall tax burden. Since child support is neither income nor deductible, couples often agreed to allocate more money to alimony and less to child support to increase the overall pot available to the family post divorce.

But bye-bye, so long, farewell. The “Tax Reform Act” does away with it. However, the new law does not go into effect until January 1, 2019, so if you’ve been thinking about who gets the china and what furniture, it’s time to get crackin’.

The effect of the bill will be felt most significantly by — I hope you’re sitting down — middle and lower-middle class families. Divorce can still be expensive for the wealthy, and the tax law changes could still lessen their pot. But the wealthy won’t really feel the pinch. There will be enough left over. Better still, since the new tax law greatly favors the wealthy, such divorcing couples will see significant income tax reductions that could make up for losing the alimony deduction.

Middle and lower income people, however, will not be able to balance out the alimony deduction loss with significant income tax savings elsewhere, and they will lose the maneuverability that in the past might have yielded an extra $200-$500 a month, or more. This can be significant for some divorcing couples.

If this sounds unfair, that’s because it is. But, if you need some incentive for finally getting rid of that spouse you’ve been dreaming of getting rid of for so long, think of 2018 as providing a going-out-of-business-sale opportunity. And just so it’s clear, those who divorce before December 31, 2018, will continue to benefit from the alimony deduction even after the new law takes effect.

For higher income families, divorcing in 2018 is still a real opportunity since they will get the alimony deduction and reap the additional tax savings the new law provides. Divorcing in 2018 could be one of those gifts that just keeps on giving. So don’t let a little wealth make you complacent. Start your tax planning now by figuring out who gets the summer place when, who gets the kids when, who gets which cars, etc.

There are some other changes in the tax bill that can affect divorcing couples, which people should also know. While there is no longer a tax exemption for children, the Child Tax Credit has been doubled to $2,000, and is now not phased out until $200,000 in earnings. In addition, the Head of Household filing status is now more valuable. All these items should be addressed in any divorce negotiation so what is most economically advantageous for all is the result.

Don’t let those changing alimony rules pass you by and put off getting divorced until tomorrow when you can get divorced today. And of course, mediating a resolution rather than litigating will reap more than just economic advantages well beyond 2018.

Gary Shaffer
Shaffer Mediation
Gary@ShafferMediation.com