California couples may be concerned about how the new tax rules may affect their plans to divorce. These changes, included in the 2017 tax bill, were scheduled to go into effect in 2019. This spurred many unhappy couples to escalate their divorce timelines in order to maintain the current tax system. Couples who finalize their divorces in 2018 will continue to use the old system, but divorces finalized after the new year will operate according to the new rules.
The changes affect how spousal support payments are taxed. For decades, alimony payments have been tax deductible for the paying partner. At the same time, the recipient paid taxes on the payments at his or her own tax bracket, which was usually lower. As a result, there was a strong incentive for a wealthier partner to agree to generous support payments in order to settle a divorce. Under the new provisions, payments will no longer be tax-deductible for the paying partner, and the recipient will receive the income tax free. This may appear to be a boon to recipients, but it’s likely to lead to lower payments overall.
In other cases, it may be more challenging to reach a divorce settlement as the incentive for spousal support is essentially eliminated under the change. However, attorneys and financial planners are considering other mutually beneficial options that can assist future exes in coming to agreements.
When spouses plan to divorce, the financial elements of the process can significantly outweigh the emotional and practical aspects. A family law attorney could work with a divorcing spouse to reach a fair agreement on a range of matters, including spousal support and property division, under current and future law.