The New York Times is the latest media outlet noting that a new tax law – that took effect in January – has added a new urgency for many Americans contemplating divorce. Why would a new tax law have such an impact on divorce?
Beat the Clock
As the New York Times article notes, several key changes in the tax law may determine whether it is better to complete or update a divorce agreement by Dec. 31st or wait until the new year.
One of the biggest changes affects alimony, which will not be a tax break for Americans after this year. The new tax law is also causing parting spouses to look more closely at benefits for their children and the values of privately owned businesses and partnerships.
In the Nick of Time
I’ve written about the area of divorce and taxes before, but the Times article notes four areas that couples considering a divorce should examine before the end of the year:
As many people have heard, the tax law is going to turn the calendar back on alimony. 77 years in fact. That was the year the Revenue Act of 1942 first made alimony deductible for the spouse paying it and taxable for the spouse receiving it.
The new tax law could become a problem in divorces settled after December 31, 2018, because under the new law, the alimony payer will be taxed on the full amount while the recipient will pay no tax on it.
It is common in prenuptial agreement to have language calculating alimony payments based on years of marriage, and a clause saying alimony payments are deductible for one spouse.
In the absence of guidance from the I.R.S., a document calling for deductible alimony might not be honored if alimony is no longer deductible.
Business valuations have always been an important component of divorce. The new tax law increases the cash flow of certain pass-through entities — businesses where the taxes are picked up by the owner, not the company — in a way that raises their value.
However, a higher cash flow – because of the change in the tax law this year – may not be known until the business owner files a tax return next year.
Should you ask for the house or retirement? The new tax law, particularly in states where deductions for high state and local taxes have been capped, may make the home less valuable than a retirement account with a similar value.
Spouses who get the retirement account will not be able to draw down on it until age 59½, but they will have a more solid financial base in their later years. And by opting for the retirement account over the house, they can avoid paying those property taxes.
The New York Times article is here.