For many people in Minnesota, news of the tax changes to come with the new year in 2019 led them to speed up their divorce agreements in order to finalize by the end of 2018. As part of the Tax Cuts and Jobs Act passed in late 2017, alimony tax rules that have been in place for decades will be dramatically altered as of Jan. 1, 2019. While the tax treatment of couples who are already divorced will remain the same, people who divorce moving forward will need to reach a settlement under the new tax laws.
Historically and until the end of 2018, the payer of spousal support could deduct the amount of the payments from his or her taxes. At the same time, the recipient would pay taxes on the income at his or her lower tax bracket. For many wealthy couples with high-asset divorces, this tax arrangement and the accompanying deductions were strong incentives to reach a settlement that included generous spousal support payments. However, this will change when the new provisions go into effect.
As of 2019, alimony payments will no longer be tax deductible. In addition, the recipient will receive the funds tax-free. While this could appear to be a boon to recipients, it is also much more likely to prolong the divorce negotiations process. It eliminates a major impetus for wealthier spouses to agree to large spousal support payments. However, tax planners and divorce attorneys may be able to come up with strategies that help protect their clients’ interests.
People who decide to divorce will face a number of significant financial choices, many of which will have effects for years to come. A family law attorney may work with a divorcing spouse to achieve a fair settlement on a range of issues, including property division and spousal support.