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How will the new tax law complicate your divorce?

If you and your spouse plan to divorce in 2019, you may be in for a rude awakening. According to CNBC, the new tax law, which Congress has set to take effect at the first of the year, will change who pays alimony on spousal support. Though lawmakers anticipate that all divorcing parties will feel the financial burden imposed by this new law, it is those in high-tax states such as California and New York that will take the greatest hit.

More than seven decades ago, Congress introduced a new law that freed up money for divorcing couples. Under this law, the payor could take a tax deduction on the amount he or she paid, while the recipient spouse paid taxes on the amount he or she "made," and according to his or her income bracket. The deduction served as an motivation of sorts for the higher-earning spouse to proffer more money to the lower-earning spouse in the form of support. Because the IRS taxed the recipient at a lower rate than what it would have the payer, the result was more money for the family unit. 

The deduction, or "divorce subsidy," often helped top earners save more than 50 percent in taxes. For instance, for every $50,000 one paid in alimony, he or she could save up to $30,000 in deductions. The recipient spouse would only have to pay $10,000 in taxes, thereby resulting in a net savings of $40,000 for the family. 

Congress's new bill, the Tax Cuts and Jobs Act, however, reverses the tax situation. Under the new bill, the payer must pay taxes on alimony instead of the recipient. Though some might believe this is a good thing for support recipients, it actually reduces the amount the courts will require higher-earning spouses to pay, which means less money for the recipient. Also, because the higher-earning spouse will have to pay taxes at a higher rate, the end result is less money for the family unit.

Congress anticipates that the new tax bill will create an additional $6.9 billion in revenue for the government over the next 10 years. Divorce lawyers foresee this new law resulting in more acrimonious divorces.

The information in this post should not be construed as legal advice. It is for educational purposes only.


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